Potential dividends versus actual cash flows in firm valuation
AbstractPractitioners 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with DeAngelo and DeAngelo (2006, 2007), we underline that cash flows create value for shareholders only if they are withdrawn from the firm, and that the use of potential dividends may lead to contradictions. This paper is a modified version of the theoretical part (sections 1-3) of Velez-Pareja, I., and Magni, C.A. (2008). Potential Dividends and Actual Cash Flows. Theoretical and Empirical Reasons for Using ‘Actual’ and Dismissing ‘Potential’, Or: How not to Pull Potential Rabbits Out of Actual Hats.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 14509.
Date of creation: 09 Mar 2009
Date of revision:
Cash flows; cash flow to equity; liquid assets; potential dividends; firm valuation; equity value; Modigliani and Miller;
Other versions of this item:
- Carlo Alberto Magni & Ignacio Velez-Pareja, 2009. "Potential dividends versus actual cash flows in firm valuation," PROYECCIONES FINANCIERAS Y VALORACION 005516, MASTER CONSULTORES.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- M40 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - General
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-13 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
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- Harry DeAngelo & Linda DeAngelo, 2007. "Payout Policy Pedagogy: What Matters and Why," European Financial Management, European Financial Management Association, vol. 13(1), pages 11-27.
- 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.
- Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
- Magni, Carlo Alberto, 2007. "Relevance or irrelevance of retention for dividend policy irrelevance," MPRA Paper 5591, University Library of Munich, Germany.
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