For what are we actually paying when we buy a share of stock?

Kraska intends to use the following examples to answer this question.

a. ABC, Inc. common preffered stock recently paid a dividend of $5.00 per year. Assume that investors require a 9% rate of return.

b. DEF, Inc. common stock recently paid a dividend of $1/50. The estimated growth rate of dividends is 6% per year, and the required rate of return is 11%.

c. GBH, Inc. pays no dividend and reinvests all its earnings into rapid growth, but it is expected to begin paying dividends in five years. The first dividend will be $5.00, dividends will grow at 5% per year, and the required rate of return throughout the period is 15%.

Don Kraska, a senior stockbroker and certified financial analyst with a well-known, full-service brokerage, was studying the list of questions that were to form the basis of his presentation before a committee of officials from the town of Webley. Two days ago he received a call from Webley's finance director. She informed him that the town had received a pleasant, but challenging, surprise in the form of a bequest from the estate of a successful local businessman, James Lawrence. Lawrence had left the town 2,000 shares of Google stock, currently valued at approximately $1,250,000. Lawrence had purchased the shares in 2004 at the subscription price of $100 per share. When the stocks value increased tremendously, Lawrence decided that rather than selling it and paying capital gains taxes, he would donate the shares to a good cause upon his death. The terms of the legacy required the town to set up a trust fund, which they would name the Virginia Lawrence Memorial Trust, in honor of James Lawrences wife, who had been active in youth-oriented community groups. The trust was to distribute 5% of the trust's value in the form of grants each year to community groups involved with youth activities The will specifically stated that the trust should sell the Google shares as soon as possible and use the proceeds to create a diversified stock portfolio. Ovei the long term, Lawrence expected the portfolios value to increase by 8% to 12% a year, thus allowing the grants to grow at the rate of inflation or better. Assume you are in Kraskas position, preparing to answer the committee's questions. The committee members are educated, intelligent people with no specialized training in investments. Kraska realizes that for some of the questions, he will inevitably have to "do the math." He originally intended to use his laptop, a projector, and a computer program that emulates a financial calculator, but when he learned that the committee included a high school math teacher and a civil engineer, he decided to use basic formulas in his presentation as well. Following are some of the questions that committee members asked at the meeting