Dividend and Non-Dividend Stock Valuation Research Paper

Dividend and Non-Dividend Stock Valuation - Research Paper Example Third, the model can be applied in the process of determining the predicted growth rate of a dividend. After calculating the price of a share of stock, it is easier for investors to determine the growth rate of dividends that is expected for the company (Pinto, 2010). This is valuable if the estimated value of a share of stock is known so that it can be helpful in predicting the dividend price. The model reflects on rationality and not reality, and is established on the principle that investors invest in stocks that have got high returns. This is how investors are supposed to behave, despite the model not always reflecting how the investors should actually behave. Some investors purchase stocks of a company that happens to be more exciting and glamorous not considering its future financial position. This shows why there is a discrepancy between the actual market value and stocks value (Groppelli & Nikbakht, 2006). Furthermore, it is difficult to determine the variables that are to be use in the model; while the model is simple and easy to use, it presents difficulty in the prediction of figures to be used in its analysis. Often companies’ dividends are not predictable hence, forecasting them is difficult. This explains why it is difficult to estimate the future company sales, which directly influences a company’s capability to grow and maintain dividends. Dividends are not the only source of income for investors. The model primarily deals with the money that is paid back to the investor and not the overall cash flow of the company. As such, the model aids in the development of investor biases. Therefore, investors do conform to their own expectations; hence, developing a tendency of coming up with their own values for stocks since most of the inputs are subjective. Those that are objective are likely to get accurate variables for