An adjustment in the dividend payout ratio should change the value of the firm under the recommended valuation approach in the text.

Question

Quizplus · Accepted Answer

The change in the dividend payout ratio will change funding requirements and, thus, the company’s capital structure. However, NOPLAT, invested capital, and free cash flow are independent of capital structure. Thus, these values should not change with changes in the payout ratio. The estimation of the WACC is done completely separately, based on an assumed capital structure going forward.

An Adjustment in the Dividend Payout Ratio Should Change the Value