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In: Finance

Celestila Moonn, an UMB MBA student selected Google stock for Capital Market/Portfolio construction project. Last week,...

Celestila Moonn, an UMB MBA student selected Google stock for Capital Market/Portfolio construction project. Last week, Moonn realized that the stock lost 10% of its value since the stock was purchased. Moonn also noticed that Google pays no dividends yet investors are willing to buy shares in this firm.

In your initial post, briefly justify: How is this possible? Does this violate the basic principle of stock valuation? Do you support Moonn’s concerns?

Solutions

Expert Solution

It does not violate the basic principle of investment and stock valuation because there are various different type of valuation methods which are trying to value the stocks for their earnings rather than the dividend so only dividend discounting model will be trying to discount the value of stocks for their dividend payments whereas free cash flows to equity or other enterprise valuations methods are based on the cash flows rather than the dividend.

Hence, even if the Google is not paying any kind of dividend and yet investors are willing to buy the shares for the capital appreciation and the growth of the company because Google believes that all the profits which are made by the Google are invested back into the business as Google is trying to deliver growth on the higher side and maximize the overall capital investment rather than dividend payment so it is not violating any kind of investment principle and it is providing the investor with capital appreciation rather than dividend payment.

jeff jeffy answered 2 years ago
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