Would a stock that pays no dividends have any value? What about a stock with negative...

Would a stock that pays no dividends have any value? What about a stock with negative earnings (a negative P/E ratio)? What about a company with negative free cash flow? What do you think?

Solutions

Expert Solution

There are many stocks which have a high amount of value and which are known for not paying any dividend because they are trying to maximize their profits by investing them into their own business rather than paying them out to the shareholders so company which are not paying dividend will does not mean that they are not having any value but it can even mean that they are having more value than those companies who are paying dividend because these company have reinvestment options and they are willing to invest into their own business rather than paying the dividend to shareholders like AMAZON

Those company who are having negative earning will generally do not want to pay the dividend because they do not have profits in their hands and for dividend to pay, they will be have to explore the options out of their reserves but they should generally not be paying any kind of dividend because it will not be viable for them to pay dividend as they are not making any profits and this company are valued according to their cash flow and book value criteria because they will be making the the cash flows in the long run even after they are not making the profits like TESLA.

A company which has a negative cash flows will also reflect the company is not able to utilise its cash in a better way and it is not able to make a high rate of return so it is representing a negative cash flow and such company will be valued through book value criteria because they are having a negative cash flow so there are various valuation model which are specific in nature as per the nature of the company and they will be used according to their own criteria like payment of dividend or cash flows or book value.

So, we cannot be deriving the straight conclusion that the company who are not paying dividend are having no value or the company who are generating negative cash are having a value because they can be valued alternatively through other methods and they are valuable.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

In practice, a common way to value a share of stock when a company pays dividends...

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.29. The dividends are expected to grow at 14 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 24. The required return...

In practice, a common way to value a share of stock when a company pays dividends...

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.15. The dividends are expected to grow at 10 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 19. The required return...

In practice, a common way to value a share of stock when a company pays dividends...

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.25. The dividends are expected to grow at 20 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 20. The required return...

In practice, a common way to value a share of stock when a company pays dividends...

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.65. The dividends are expected to grow at 19 percent over the next five years. In five years, the estimated payout ratio is 30 percent and the benchmark PE ratio is 31. What...

In practice, a common way to value a share of stock when a company pays dividends...

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.15. The dividends are expected to grow at 10 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 19. The required return...

In practice, a common way to value a share of stock when a company pays dividends...

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.36. The dividends are expected to grow at 13 percent over the next five years. In five years, the estimated payout ratio is 40 percent and the benchmark PE ratio is 19. a....

In practice, a common way to value a share of stock when a company pays dividends...

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.15. The dividends are expected to grow at 10 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 19. The required return...

Preferred stock A pays dividends quarterly. Preferred stock B pays dividends annually. All else equal, which...

Preferred stock A pays dividends quarterly. Preferred stock B pays dividends annually. All else equal, which will have the higher value? A B A=B

What explains why a stock with a negative beta would have a lower return than a...

What explains why a stock with a negative beta would have a lower return than a risk-free t bill? Under what situation would buying a stock with a negative beta make any sense for an investor?

What is the value of a common stock if a. the firm's earnings and dividends are...

What is the value of a common stock if a. the firm's earnings and dividends are growing annually at 20 percent, the current dividend is $2.64, and investors require a 15 percent return on investments in common stock? b. What is the value of this stock if you add risk to the analysis and the firm's beta coefficient is 0.8, the risk-free rate is 9 percent, and the return on the market is 15 percent? c. If the price of...

Subjects