Your client's investment stocks are not paying cash dividends but he wants to know how much the value of her stocks is. You inform her that there is a way to determine the value without cash dividends; what would you use to determine the stock value?

Question

Quizplus · Accepted Answer

To determine the value of stock investments that are not paying cash dividends one need to use P/E ratio. The ratio or earnings multiplier tells an investor the price being paid for each $1 of earnings. This is a major advantage of P/E ratio. The dividend discount model assumes the firm is paying or is going to pay a cash dividend. However, as a disadvantage, the P/E ratio does not tell whether a sock is overvalued or undervalued to its market price. Investors are required to draw inference to historical P/E ratios in determining if the P/E ratio is high or low. The dividend discount model allows for comparison to determine whether a stock is overvalued or undervalued to its actual price.

Your Client's Investment Stocks Are Not Paying Cash Dividends but He