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Neezy
Does Retained Earnings affect the valuation of a company?
Say you own a company(100 % ownership) that has 1,000,000 USD of retained earnings. Retained Earnings = beginning retained earnings + Net income - Dividends, so basically there is 1,000,000 worth of money that isnt paid as dividends.
Usually when valuing a company you use the discounted cash flow method which discounts all the projected cash flow for the coming years. However it doesnt take into consideration the past value, so if the valuation came out to be 500,000 USD then if someone wants to buy this company should he pay 500,000 USD or should he pay 500,000 + 1,000,000 = 1,500,000 (because the original owner didnt get any of the profits as dividends from the company's past performance)
Hope that you can answer my question.
Thank you :)
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