Chapter 11, Problem 1QE

Explain the theory behind the dividends-based valuation approach. Why are dividends value-relevant to common equity shareholders?

To determine

Explain the theory behind the dividends-based valuation approach, and also discuss the value-relevant to common equity shareholders.

Explanation of Solution

Cash dividend:

The amount of cash provided by a company out of its distributable profits as a return for the amount invested by them is referred as cash dividend.

Straightforward is the theory behind the dividends-based valuation approach. As the dividends are cash flows directly to the equity shareholders, dividends are value-relevant to common equity shareholders.