Why is Fundamental Value so Fundamental to Directors?

Abstract

Fundamental value for a firm is that range of value based upon the present value of estimated future cash flows. Fundamental value and market value may differ. Where market value is above fundamental value, the firm may create wealth from judiciously timed equity issues to parties who are currently non-shareholders, particularly in takeover situations. Where market value exceeds fundamental value, return of surplus funds should logically be via a special dividend rather than a share repurchase. Where fundamental value per share exceeds market value per share, the firm may create shareholder value for continuing equity investors by timely buybacks.