How Will An Increase In The Cash Dividend Effect FCFE?

CFA Level II
#1

Question: How will an increase in the cash dividend effect FCFE? Answer: The dividend does not change the amount of cash available to equity holders – meaning there is no change to FCFE Why?

#2

it will not. simple answer. dividends is post NI - which in the FCFE model is a starting point. so dividends DO NOT affect either FCFE or FCFF.

#3

thanks

#4

Think about it this way: The dividend is a _use_ of FCFE. Equity holders can decide what to do with the FCFE. How high a dividend they decide is irrelevant - the cash flow they had available is still the same.

#5

There is a diagram in SchweserNotes (FCF valuation method for equity) that I found very helpful when remembering this. You may want to take a look.