Common Dividends

Now that we have projected shares outstanding in Step 17, we can compute common dividends. We begin by projecting common dividends per share equal to the dividends in the most recent period, unless we have a reason to believe that the dividend will be different going forward (e.g. the company announced a dividend increase since reporting results for its most recent period).

Next, we adjust common equity on the balance sheet to subtract dividends distributed to shareholders. Specifically, the dividend reduces the retained earnings component of common equity, which we do not break out from other common equity components in this model. Note that aggregate dividends are computed using basic shares outstanding, rather than fully diluted shares. This is because the shares that account for the difference between basic and fully diluted shares are hypothetical shares on which no actual dividends are paid.

Finally, we reflect the aggregate dividends in financing cash flows on the cash flow statement.