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Stock Valuation and Future Dividends Response

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Give a response to the statement:

"You say stock price equals the present value of future dividends? That's crazy! All the investors I know are looking for capital gains."

This statement takes into consideration the fact that people invest in shares of stock for different reasons. Some people invest long-term for the constant dividends that are paid at regular intervals. Other people are looking to buy shares and sell them in the short-term, on the up-tick, to acquire capital gains. These differences in investment strategy may influence a person's perception on the stock price as being either high or low, making it more or less attractive.

However, I think it is important to note that the stock price does equal the present value of future dividends. Even if you wanted to contribute some portion of the price to future earnings, one must realize that this portion of the price is going to be the same amongst stocks in comparable risk classes. Therefore, it is my interpretation that you can simply dismiss this when determining the present value and focus primarily on dividends.

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Solution Summary

This solution discusses how today's stock prices are not based on present value of future dividends, and also presents the factors that affect the stock prices.

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I do not agree with this statement. In my opinion, the stock price is based on expectations about future cash flows of the ...

Solution provided by:
Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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