Potential dividends versus actual cash flows in firm valuation

Carlo Alberto Magni and Ignacio Velez-Pareja ()

MPRA Paper from University Library of Munich, Germany

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with DeAngelo and DeAngelo (2006, 2007), we underline that cash flows create value for shareholders only if they are withdrawn from the firm, and that the use of potential dividends may lead to contradictions. 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.

Keywords: Cash flows; cash flow to equity; liquid assets; potential dividends; firm valuation; equity value; Modigliani and Miller (search for similar items in EconPapers)
JEL-codes: G12 G30 G31 M21 M40 M41 (search for similar items in EconPapers)
Date: 2009-03-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://mpra.ub.uni-muenchen.de/14509/1/MPRA_paper_14509.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/14685/1/MPRA_paper_14685.pdf revised version (application/pdf)

Related works:
Working Paper: Potential dividends versus actual cash flows in firm valuation (2009)
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