Valuation, Personal Taxes, and Dividend Policy under Passive Debt Management

We derive consistent valuation models in accordance with the flow to equity and adjusted present value approaches, which allow accounting for the firm’s dividend policy and passive debt management in light of differentiated personal taxes at the equity investor level. Specifi-cally, we establish appropriate adjustment formulas for the relationship between the firm’s unlevered and levered cost of equity, which are the basis for the unlevering and relevering of beta factors. Furthermore, using simulations, we show that dividend policy has a significantly positive effect on equity market value.