1. State the Miller Modigliani (MM) dividend irrelevance proposition
Modigliani and Miller (MM) proposed that in an ideally simple and perfect capital market, shareholders are indifferent between dividend and capital gains, and the value of a company is determined solely by the earning power of its assets and investments. Focuses more on firm value but not on firm risk. MM argued that if a company with investment opportunities decides to pay dividend, so that retained earnings are insufficient to finance all its investments, the shortfall in funds will be made up by obtaining additional funds from outside sources. As a result of obtaining outside finance instead of using retained earnings: Loss of value in existing shares = Amount dividend paid. If we hold the company’s investment policy and capital structure
Modigliani and Miller (MM) proposed that in an ideally simple and perfect capital market, shareholders are indifferent between dividend and capital gains, and the value of a company is determined solely by the earning power of its assets and investments. Focuses more on firm value but not on firm risk. MM argued that if a company with investment opportunities decides to pay dividend, so that retained earnings are insufficient to finance all its investments, the shortfall in funds will be made up by obtaining additional funds from outside sources. As a result of obtaining outside finance instead of using retained earnings: Loss of value in existing shares = Amount dividend paid. If we hold the company’s investment policy and capital structure