Magni, Carlo Alberto and Vélez-Pareja, Ignacio (2009): Potential dividends versus actual cash flows in firm valuation. Forthcoming in: ICFAI Journal of Applied Finance
Preview |
PDF
MPRA_paper_14509.pdf Download (183kB) | Preview |
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with DeAngelo and DeAngelo (2006, 2007), we underline that cash flows create value for shareholders only if they are withdrawn from the firm, and that the use of potential dividends may lead to contradictions.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.
Item Type: | MPRA Paper |
---|---|
Original Title: | Potential dividends versus actual cash flows in firm valuation |
Language: | English |
Keywords: | Cash flows, cash flow to equity, liquid assets, potential dividends, firm valuation, equity value, Modigliani and Miller |
Subjects: | G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M40 - General G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics |
Item ID: | 14509 |
Depositing User: | Carlo Alberto Magni |
Date Deposited: | 08 Apr 2009 03:22 |
Last Modified: | 27 Sep 2019 12:42 |
References: | Benninga, S.Z. and Sarig, O.H. (1997) Corporate Finance. A Valuation Approach. McGraw- Hill. Brealey, R. and Myers, S.C. (2003) Principles of Corporate Finance, 7th edition, New York: McGraw Hill-Irwin. Copeland, T.E., Koller, T. and Murrin, J. (1990) Valuation: Measuring and Managing the Value of Companies. John Wiley & Sons. Copeland, T.E., Koller, T. and Murrin, J. (1994) Valuation: Measuring and Managing the Value of Companies, 2nd Edition. John Wiley & Sons. Copeland, T.E., Koller, T. and Murrin, J. (2000) Valuation: Measuring and Managing the Value of Companies, 3rd Edition. John Wiley & Sons. Damodaran, A. (1999) Applied Corporate Finance. A User’s Manual. New York: John Wiley & Sons. Damodaran, A. (2006a) Damodaran on Valuation, second edition. Hoboken, NJ: John Wiley & Sons. Damodaran, A. (2006b) Valuation approaches and metrics: a survey of the theory and evidence. Available at SSRN: <http://www.stern.nyu.edu/~adamodar/pdfiles/papers/valuesurvey.pdf> (November). Originally published in Foundations and Trends® in Finance, 1(8), 693-784, 2005. Damodaran, A., (2008) Equity instruments: Part I. Discounted cash flow valuation, <www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/packet1.pdf>, (updated January 14, 2008). Accessed February 16, 2008. DeAngelo, H. and DeAngelo, L. (2006) The Irrelevance of the MM dividend irrelevance theorem. Journal of Financial Economics, 79, 293–315. 22 DeAngelo, H. and DeAngelo, L. (2007) Payout policy pedagogy: what matters and why. European Financial Management, 13(1), 11-27. Fernández, P. (2002) Valuation Methods and Shareholder Value Creation. San Diego: Academic Press. Fernández, P. (2007) Company valuation methods. The most common errors in valuation. Working paper (February). Available at SSRN: <http://ssrn.com/abstract=274973>. Jensen, M.C. (1986) Agency cost of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323-329. Available at SSRN: <http://ssrn.com/abstract=99580> or DOI: 10.2139/ssrn.99580. Jensen, M.C. and Meckling W.H. (1976) Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305-360. Magni, C.A. (2007) Relevance or irrelevance of retention for dividend policy irrelevance. Working Paper (November). Available at SSRN: <http://ssrn.com/abstract=1027401>. Miller, M.H. and Modigliani, F. (1961) Dividend policy, growth and the valuation of shares. The Journal of Business, 34(4), 411-433, October. Modigliani, F. and Miller, M.H. (1958) The cost of capital, corporation taxes and the theory of investment. American Economic Review, 47, 261-297. Modigliani, F. and Miller, M,H.(1963) Corporate income taxes and the cost of capital: a correction. American Economic Review, 53, 433-443. Nau, R.F. and McCardle, K.F. (1991) Arbitrage, rationality, and equilibrium. Theory and Decision, 31(2-3), 199-240, September. 23 Penman, S. (1992) Return to fundamentals. Journal of Accounting, Auditing and Finance, 7, 465-483 (Fall). Reprinted in R. Brief and K.V. Peasnell (Eds.), Clean Surplus: A Link Between Accounting and Finance, New York and London: Garland Publishing. Penman, S. and Sougiannis, T. (1998) A comparison of dividends, cash flow, and earnings approaches to equity valuation. Contemporary Accounting Research, 15(3), 343-383, Fall. Penman, S. (2007) Financial Statement Analysis and Security Valuation, third edition. New York: McGraw Hill. Ruback, R. S. (2002). Capital cash flows: a simple approach to valuing cash flows. Financial Management, Summer, 85-103. Shrieves, R.E. and Wachowicz, J.M. (2001) Free Cash Flow (FCF), Economic Value Added (EVA ), and Net Present Value (NPV): A Reconciliation of Variations of Discounted-Cash-Flow (DCF) Valuation. The Engineering Economist, 46(1), 33-52. Smith, J.E. and Nau, R. (1995) Valuing risky projects: option pricing theory and decision analysis. Management Science, 41(5) 795-816, May. Tham, J. and Vélez-Pareja, I. (2004) Principles of Cash Flow Valuation. Academic Press. Varian, H.R. (1987) The arbitrage principle in financial economics. The Journal of Economic Perspectives, 1(2), 55-72, Autumn. Vélez-Pareja, I. (1999a) Construction of free cash flows: a pedagogical note. Part I (December). Working Paper. Available at SSRN: <http://ssrn.com/abstract=196588> Vélez-Pareja, I. (1999b) Construction of free cash flows: a pedagogical note. Part II (December). Working Paper. Available at SSRN: <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=199752>. 24 Vélez-Pareja, I. (2004) The correct definition for the cash flows to value a firm (free cash flow and cash flow to equity) (September 30), Working Paper. Available at SSRN: <http://ssrn.com/abstract=597681>. Vélez-Pareja, I. (2005a) Once more, the correct definition for the cash flows to value a firm (free cash flow and cash flow to equity). Working Paper (February 3). Available at SSRN: <http://ssrn.com/abstract=642763>. Vélez-Pareja, I. (2005b) Construction of cash flows revisited. Working Paper (August 16). Available at SSRN: <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=784486>. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/14509 |
Available Versions of this Item
- Potential dividends versus actual cash flows in firm valuation. (deposited 08 Apr 2009 03:22) [Currently Displayed]