I'm reading a macro book (Blanchard's) and the way he values shares is by calculating the net present value of all dividends we expect to receive by owning some stock, discounted by the interest rates (assuming investors are risk-neutral and only care about expected return). Well, by reading some newspapers and some chapters of a book on corporate finance, I've noticed that not many firms' shares pay dividends, being the paid dividends concentrated in a few firms only. In fact, in corporate finance, it seems managers are taught that with the existence of taxes on personal income(dividends apply), it's preferable to repurchase shares which increase the earnings per share ratio (EPS), which in turn multiplied by the price-per-earnings of the industry the firm is in, gives an expected price for the stock. My question is why should we value stock if no dividend is paid? Aren't selling stock and receiving dividend the only two sources of current income that owning shares give?

Any help would be appreciated


We value stock if no dividends are paid, exactly for the reason you mention, we can sell them at a higher value later on. The value added to the stock if we invest the profits (would be dividends) into the company should be around the same value the dividends would pay off. However instead of paying taxes each time we get a dividend we can pay them just once when the stock is sold potentially saving on taxes.

P.s. Blanchard is a great book and how I first started learning macro :).

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  • $\begingroup$ After Blanchard, what book would you recommend for intermediate level? $\endgroup$ – An old man in the sea. Sep 14 '15 at 7:55
  • $\begingroup$ Do you mean besides Blanchard or as an extension to Blanchard? Besides Blanchard I would maybe look at either Mankiw's Macroeconomics or "Macroeconomics: A European Text" by Burda and Wyplosz. If you're looking to go beyond intermediate, after mastering Blanchard it gets very tricky as there's a big jump there to advanced. However I would recommend "Recursive Macroeconomic Theory" Sargent and Ljungqvist as well as "Recursive Methods in Economic Dynamics" by Stokey and Lucas. $\endgroup$ – BB King Sep 24 '15 at 11:07

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