If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Question

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Switching to a 100% payout policy means the company will distribute all its earnings as dividends, leaving less reinvestment in the business for growth. This could reduce the stock's future price potential, negatively affecting the value of long-term options.

If a Company Announces a Change in Its Dividend Policy