1) Apple Inc., a company listed on the stock exchange which recently did not giv

Question

1) Apple Inc., a company listed on the stock exchange which recently did not give dividend to shareholders and yet investors are willing to buy their shares. How is this possible? Does this violate the basic principle of stock valuation? Discuss.

2) Google search of the phrase “beat the market” yields more than 14 million results. Many are investing and trading strategies that promise to outperform a market benchmark. The idea of generating market-beating returns is pervasive.

Suppose you invest in the stock market and double your money in a single year while the market, on average, earned a return of only about 15%. Is your performance a violation of market efficiency? Explain.

Explanation / Answer

1) The company gives dividends because of two main reasons-

Not distributing the dividends does not mean that the company is at loss or the market scenario for Apple is bleak. On the contrary, it means that the firm is very optimistic about the growth scenarios in the future and instead of giving dividends to the shareholders, it will plowback (reinvest) the entire profit in order to expand the capacity of the operations to serve the market in a better way.

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