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2
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Causal Valuation Factors
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What are the causal factors in the Table 1.1 combinations?
EXPECTED FUTURE $BENEFITS
The expected future dollar benefits ($Benefits) to be received by stockholders are dividends. They are the only benefit that can be transferred directly to the shareholder from the corporation. Dividends are paid out of earnings. So investors must look to earnings as the generator of expected future $Benefits. The natural consequence is that investors expend vast time and energy analyzing and forecasting earnings, particularly earnings per share. Corporate managements also spend energy and time on reported corporate earnings per share (see Appendix 2A).
Management must eventually transfer benefits from the corporation, a separate legal entity from stockholders, so the common share may have value. The share purchased is only a claim on future, expected dividends. If none is paid, the shareholder claim is worthless. Of course the shareholder may prefer that dividends be postponed while the corporation reinvests retained earnings to grow the expected dollar amount of future dividends.
KEYWORD “FUTURE”
The key word is future. The expected earnings and dividends generated as expected $Benefits to the shareholders must occur in the
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