Impact of issuance of dividends in a DCF
How do you factor in the issuance of dividends in a DCF model? For example a company decides to issue $100 of dividends in Year 3 of the forecast period.
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I’ll try to take a stab at this! Dividend payout is a portion of or the entire cashflow that is available to the equity shareholders that particular year. As such, there is no need to account for it by adjusting the FCFE or FCFF formula because it is already embedded within the calculation itself.
Put another way - to incorporate dividends, you would first subtract the discounted dividend from the FCF in Y3, calculate the value of the company then add the discounted dividend back to the value. I.e. the net result is neutral. Because dividends are paid out of cash anyway, so they reduce FCFE/FCFF.
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