This post addresses dividends and related issues.
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Dividends are said to be the basis for the value of stocks. If that's true, how do we explain the fact that companies that pay no dividends often have substantial market value? (Such companies are usually relatively young and in high growth fields.)
First explain the phenomenon in terms of the individual valuation model (a stream of dividends followed by a selling price, equation (13-1).
Then reconcile the idea with the whole market model (an infinite stream of dividends).
Can you explain cases in which management claims their companies will never pay dividends? (Hint: Does such a claim make sense?)
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The solution provides explanations for each question presented regarding dividends and dividend payments.
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dividDividends are said to be the basis for the value of stocks. If that's true, how do we explain the fact that companies that pay no dividends often have substantial market value? (Such companies are usually relatively young and in high growth fields.)
- Oftentimes companies have positive earnings and do not pay out dividends. When this happens, the income that was not paid out as dividends is reinvested back into the company. This has a direct effect on the company, as it allows the company to grow higher in value ...
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