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Chapter 4: 13DQ (page 320)

What approaches can be taken in valuing a firm’s stock when there is no cash dividend payment?

Short Answer

Expert verified

Under no dividend case, the stock is valued based on the present value of earnings per share and anticipated future stock price.

Step by step solution

01

Approaches to value stock

A stock can be valued under two conditions –

1) stocks paying dividends either with growth or without growth

2) Stock paying no dividend

Under the first condition, stock is valued based on the growth rate, and the stock is valued against the receivable dividend and required yield rate.

02

Stock valuation under no dividend case

A stock that does not provide any dividend actually rewards the investors by reinvesting that amount into the business and providing a higher earnings per share.

So the dividend payment is compensated with the increase in the earnings per share.

Thus the stock valuation, in this case, would be done based on determining the present value of earnings per share and the present value of anticipated future stock price.

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Question: What is the present value of a 10-year annuity of $3,000 per period in which payments come at the beginning of each period? The interest rate is 12 percent.

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