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

Quizplus · Accepted Answer

Dividends do not enter into the OPM pricing formula.We would expect the stock of a firm that retains all of its earnings to grow over time due to the reinvestment of its earnings, whereas a firm that retains zero earnings should not grow much if any.therefore, the value of the firm's long-term options should decline if it announces a change from a zero to a 100% payout policy.

If a Company Announces a Change in Its Dividend Policy