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Potential dividends versus actual cash flows in firm valuation

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Author Info
Carlo Alberto Magni ()
Ignacio Velez-Pareja ()

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Abstract

Practitioners and some academics use potential dividends rather than actual payments to shareholders for valuing a firm’s equity. We underline the differences between the two methods and present some arguments supporting the thesis that firm valuation with potential dividends overstate the actual value of the firm’s equity. In particular, consistently with DeAngelo and DeAngelo (2006, 2007), we underline that cash flows create value for shareholders only if they are withdrawn from the firm, and that the use of potential dividends may lead to contradictions.

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Paper provided by UNIVERSIDAD TECNOLÓGICA DE BOLÍVAR in its series Documentos de Trabajo with number 005516.

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Length: 24
Date of creation: 11 May 2009
Date of revision:
Handle: RePEc:col:000162:005516

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  1. Harry DeAngelo & Linda DeAngelo, 2007. "Payout Policy Pedagogy: What Matters and Why," European Financial Management, Blackwell Publishing Ltd, vol. 13(1), pages 11-27. [Downloadable!] (restricted)
  2. DeAngelo, Harry & DeAngelo, Linda, 2006. "The irrelevance of the MM dividend irrelevance theorem," Journal of Financial Economics, Elsevier, vol. 79(2), pages 293-315, February. [Downloadable!] (restricted)
  3. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
  4. Varian, Hal R, 1987. "The Arbitrage Principle in Financial Economics," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 55-72, Fall. [Downloadable!] (restricted)
  5. Magni, Carlo Alberto, 2007. "Relevance or irrelevance of retention for dividend policy irrelevance," MPRA Paper 5591, University Library of Munich, Germany, revised 2009. [Downloadable!]
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This page was last updated on 2009-11-18.

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