One primary reason individuals invest in stocks is to receive returns on their investment in the form of dividends. Not all companies opt to offer dividends to their investors, however. In their article The Dividend Discount Model in the Long-Run: A Clinical Study, the authors discuss the importance of three variables that affect the valuation of a dividend and non-dividend paying stocks. They note how valuation is influenced by the size, timing, and uncertainty of cash flows that the asset will generate for investors over its lifetime.
QUESTIONS
1. Use the Internet to access financial sites to find a company that does not pay dividends.
2. From a theoretical view, explain the merits and/or pitfalls of using the dividend growth model to estimate the stock price of a non-dividend paying stock.
3. Then, compare and contrast how these variables affect the valuation of a dividend paying stock and a non-dividend paying stock.