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assume that stock prices equal the fundamental values of stocks, why would investors buy the stock...

assume that stock prices equal the fundamental values of stocks, why would investors buy the stock of a firm that does not pay a dividend?

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Answer #1

If a firm that does not pay dividends, it typically spends its earnings for investment with purpose of expansion. Enhanced operations will most likely increase future firm performance, and it is also a signal for the firm's strong financial situation and prospects that made managers invest in future projects. Therefore, the fundamentals will most likely get stronger in future for a non-dividend-paying firm. This will lead to an appreciation of the firm's stock value in future, which makes current investors buy its stock.

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