Guys, I don't understand why DCF is not affected by dividends tax. Let's assume that dividend tax goes from 0% to 15%. FCFE is not going to change, what is the rational behind it? I guess that since shareholders are going to receive less dividends, the company's value should reduce somehow cause investor are less willing to pay for it. I thought that maybe cost of equity might increase to compensate the tax effect and this would reduce FCFE. But I didn't find anything about that. I hope someone can help me to find this out. Thanks!

DCF isn't affected by dividend tax for a couple reasons 1). The "dividend tax" is borne by the equity holders, not the firm, and is therefore highly variable based on the individual equity holders' tax situation (i.e. has no impact on the firm's FCFE generation), and 2) the firm does not HAVE to pay dividends. It could buy back shares which is more tax efficient for the very reason that it doesn't directly cause tax implications for the recipient.

Dividends tax effect on DCF

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Dividends tax effect on DCF

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