According to the dividend-growth model, a stock which pays no dividends is worthless! Discuss this statement.
From a strict formula point of view, the statement appears correct after all, if D1 equals zero, the model calculates a zero present value. And if the reason a company is not paying dividends is poor performance, its value may indeed be low, although probably not zero. However, many companies elect not to pay dividends when they are doing well, especially young and growing firms. As long as a company can reinvest its retained earnings at a rate of return greater than that required by its investors, the investors should see this as a value-adding action which will permit the company to pay high dividends at some future date. The problem is with the dividend-growth model, which cannot deal with a company which pays no dividends for some period but then begins to pay a high dividend in the future.
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