Potential Dividends Versus Actual Cash Flows in Firm Valuation

The ICFAI Journal of Applied Finance, Vol. 15, No. 7, pp. 51-66

24 Pages Posted: 8 Apr 2009 Last revised: 20 Dec 2010

See all articles by Carlo Alberto Magni

Carlo Alberto Magni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering)

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: April 6, 2009

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with DeAngelo and DeAngelo (2006, 2007), we underline that cash flows create value for shareholders only if they are withdrawn from the firm, and that the use of potential dividends may lead to contradictions.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

Keywords: Cash flows, cash flow to equity, liquid assets, potential dividends, firm valuation, equity value, Modigliani and Miller

JEL Classification: G12, G31, G35, M41

Suggested Citation

Magni, Carlo Alberto and Velez-Pareja, Ignacio, Potential Dividends Versus Actual Cash Flows in Firm Valuation (April 6, 2009). The ICFAI Journal of Applied Finance, Vol. 15, No. 7, pp. 51-66. Available at SSRN: https://ssrn.com/abstract=1374070

Carlo Alberto Magni (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering) ( email )

Italy

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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