Ddm Case

dividends are the primary way to share the company profit with the shareholders for four centuries (Allen and Michaely 2003). Dividends are given as a guide for investors to evaluate the value of stock. Thus, Dividend Discount Model (DDM) is one of methods for the stock valuation by calculating the present value of future dividend payments (Etzel 2003). Unfortunately, DDM cannot effectively measure the companies that never pay dividend or small dividends payout rate caused by the assumption of the constant dividends payout rate (Carlson & Lackman, cited in Reilly and Norton 2007). Also, the initial dividends payment and the dividends payout rate would be zero, even if the growth rate has changed (Carlson & Lackman 2007). The authors analyzed and applied the value of Google which one of the growth stocks. They found that when apply DDM, the value of Google would be valued at zero. Hence, the DDM is a tool that only use for value of companies which pay high dividends.

there are many companies that not pay dividends especially growth stocks such as eBay, Amazon and many IT companies. They use those retained profits to reinvest on their capital projects. A good example, Google claimed that they are no intention to pay dividends in ‘foreseeable future' (Google Inc 2013). The share price was $85 at 2004 and almost $870 at Oct 2013 (Yahoo Finance 2013). The value of Google increased approximately ten times over 9 years. Google are now aggressively investing in R&D and technology aspect. It proves that through the capital appreciation, the value of the shares and the total returns for investors would be boosted up (Hui & Siu 2011). In addition, the non-dividend companies also can gain the taxation benefits in relation to dividends paid since the long term capital gains tax is lower than the taxation on dividend (Itzhak 2010). Likewise, Fama and French (2001) pointed out the non-dividends companies are higher growth opportunities and market value