According to the general dividend valuation model, a firm that reinvests all its earnings and pays no cash dividends can still have a common stock value greater than zero

Finance Dec 19, 2020

According to the general dividend valuation model, a firm that reinvests all its earnings and pays no cash dividends can still have a common stock value greater than zero. How is this possible?

Expert Solution

A firm that has previously reinvested all of its earnings and pays no cash dividends can still have a common stock value greater than zero because an investor can assume that the firm may pay a dividend in the future. Further, investors could receive future dividends from the sale of assets if the firm ceases to operate, or possibly receive proceeds from the sale of common stock if the firm is acquired by another organization.

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