Final answer:
The cash flow of stockholders is calculated as the Net income minus Dividends, which shows the actual cash flow to the stockholders from the company's profit after all expenses. It includes dividends paid to shareholders and the potential for capital gains from the sale of stock at a higher price.
Step-by-step explanation:
The calculation of cash flow of stockholders refers to the net cash that is moved into or out of a company from its investors and equity holders. This calculation includes a variety of activities that impact shareholder value, which are detailed in a firm's financial statements.
Option (c), Net income - Dividends, is the correct formula for calculating cash flow to stockholders. This option reflects the actual cash provided to stockholders through dividends, after the company has earned its net income. Here, net income represents the profit that is left over after all expenses and taxes have been paid. Dividends are the portion of profit that is distributed to shareholders. If a company pays out more in dividends than its net income, it implies that the company may have used additional cash or financing to provide these dividends.
It's important to understand that a company can reinvest a portion of its profits through reinvesting. If reinvestment leads to growth that exceeds depreciation, the company can grow the value of its stock, providing capital gains to investors in addition to any dividends paid out. Therefore, stockholders' return includes receiving dividends and potential capital gains from the sale of stock at a higher price than the purchase price.