Question

Suppose you are looking for some investment opportunities in the stock market. 1. You observe that Google or Alphabet Inc. (goog) is currently traded at $1133 per share. However, it has never paid any dividends to its shareholders. Your friend concluded that the stock price of google is totally overvalued by applying the dividend discount model. Do you agree? Explain your answer.

Answer 1

Answer : No, we cannot agree to the given conclusion

Explanation :

The basic idea of using a dividend discount model to value the price of a stock is that : According to the dividend discount model, the value of a stock can be calculated by finding out the present value of all expected future dividend payments from the stock.

Now here the current traded price of the stock is $1133 per share. Also another important factor to keep in mind is that it has never paid any dividends to its shareholders. So without that one cannot estimate any future dividend payments, since the company has never paid dividends.

Thus the dividend discount model cannot be applied here in order to value the stock since we don't have any idea about the futiure dividend payments (even if any). Thus the conclusion regarding the stock price being overvalued by applying the dividend discount model cannot be agreed upon.