Which of the following statements (if any) is (are) true concerning companies that do not pay dividends?

Question

Quizplus · Accepted Answer

Companies that do not pay dividends still have a cost of equity capital, which can be estimated using the Capital Asset Pricing Model (CAPM). This model takes into account the risk-free rate of return, the expected market return, and the company's beta to estimate the expected return on equity. This can be used to calculate the cost of equity capital for companies that do not pay dividends.

B is false because the short-term growth rate of earnings per share does not necessarily reflect the cost of equity capital.

C is questionable because the dividend capitalization model relies on the assumption that the market capitalizes dividend payments, which may not be true for non-dividend paying companies.

D is false because the cost of equity capital can be estimated using the CAPM and other methods mentioned in choice A.

Which of the Following Statements (If Any) Is (Are) True