Question

QUESTION 4 Like many large-cap tech stocks, Uber does not currently pay dividends to its shareholders and is unlikely to initiate a dividend stream soon given the uncertainty induced by Covid-19. a. How is it possible that investors are willing to buy shares in Uber if the stock price is the present value of expected future dividends (according to the valuation theory)? (2 marks) b. Under what circumstances might a company like Uber choose not to pay dividends? (2 marks)

Answer 1

S a) Why investors are Sol. Yes, the stock price willing to buy uber stock can be find out through present expected future dividends but it's not wise or correct to use ODM (Dividend Discount model) because Uber Stock don't have a dividend ( conifant) history. So, they or investors are using different equity valuation technique like Free Cash flow valuation, market based valuation or Residual income valuation which henceforth, giving great opportunity for investors to buy uker stock which is not justified by oom valuation. b) Under what circumstances might a company like when choose not to pay dividends Jol: There are some reasons for choosing dividend ie. they would have more investible opportunities which will eventually create shareholder wealth. The extra earnings that can be paid in form of dividends can be used in the existing operations, company bring egeing Merge company out bynergy for the company's future & henceforth, create not to pay which aber is is new projects or ventures. & Acquire (M&A) which will paying out dividends. shareholder wealth rather csl had with CamScanner

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