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While this chapter utilizes dividend payouts to value a share of stock, many companies do not pay dividends. Why would i...

While this chapter utilizes dividend payouts to value a share of stock, many companies do not pay dividends. Why would investors be willing to buy shares in non-dividend paying companies? Under what circumstances might a company appropriately choose to not pay dividends?

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An investor will still preferred a non-dividend paying stock if he believes that the company is a high growth company. The company can be valued using the free cash flow method. If the growth rate of the company is high, it would imply that the company has high profitability prospects and hence the stock is liable to increase in price.

They might be many situations in which the management may decide not to pay dividends. The company may have the option of investing in a profitable project for which it will prefer to retain earnings rather than pay them out as dividend.

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