Final answer:
Option c. Dividends are used in valuation to compare the future benefits of different investment opportunities. They provide a tangible return and reflect the company's profit distribution, impacting the present discounted value of the stock. Valuation includes estimates like expected profits and discount rates, subject to different investor opinions.
Step-by-step explanation:
One rationale for using expected dividends in valuation is that dividends can be used to compare the future benefits of alternative investment opportunities. Dividends provide a tangible return to shareholders and reflect the distribution of a company's profits. The expected dividend stream, along with potential capital gains, is considered by investors to assess the present discounted value (PDV) of a stock.
When valuing a firm, dividends are factored into the PDV. This approach is rooted in the concept that the value of an investment is the sum of all future cash flows it is expected to generate, discounted back to their present value. Since dividends represent a portion of the profits paid directly to shareholders, they are a manifestation of a company's financial health and directly impact an investor's return.
However, expected profits, interest rates for discounting, and dividend payments are estimates and can be subject to different opinions among investors. Ultimately, the value of an investment boils down to what one is willing to pay now for a stream of projected future benefits.