Question

5. Dividends provide investors with a return on investment and are incorporated into the valuation process by many analysts. Discuss both the advantages and disadvantages of including future dividend payouts, especially pertaining to GROWTH companies, when attempting to value a company’s stock (DIVIDEND CONUNDRUM ISSUE). How accurate is a potential future dividend in determining a current stock price? Include discussions from class to illustrate your point

Answer 1

This is based on a general discussion topics.The expert is not supposed to know what are the discussions which have discussed in class for this topic.So read and then appropraitely rate that.

Dividends are the the stream of income from a stock and the present value of the future dividends provide a fair value of the firm involved. However , this assumption is true when dividend payments truly reflect the growth in income and the actual return from the companies and reflect the true trend of income of the company.

However, in the situations of dividend conundrum , when the company does not perform well to offer a handsome dividend , but to keep its share price intact or to have a better price for next share issue decide to offer a good dividend , then depending on dividend for firm valuation may be misleading.

In such a situation the dividend is not truly reflecting the earning potential of the company and any valuation based on dividend will be inflated valuation.

Therefore , dividend based valuation must be used with proper discretion and detailed knowledge about the details of dividend and its basis to judge its usefulness in firm valuation.