Mm dividend irrelevance theory, Finance Basics

MM Dividend Irrelevance Theory

Such was advanced via Modigliani and Miller in 1961.  The theory asserts to a firm's dividend policy has no effect on cost of capital and on its market value.

They argued that the firm's value is primarily determined via:

  1. Capability to produce earnings from investments
  2. Level of business and financial risk

Corresponding to MM dividend policy is a passive residue determined via the firm's necessitate for investment funds.

It does not subject how the earnings are divided between dividend payment to retention and shareholders. Consequently, optimal dividend policy does not exist. Whereas investment decisions of the firms are known, dividend decision is a mere detail without any type of effect on the value of the firm.

They base on their arguments on the following suppositions:

1. No personal kites or corporate

2. No transaction cost associated along with share floatation

3. A firm has an investment policy that is independent of its dividend policy or a fixed investment policy

4. Efficient market - all investors have similar set of information concerning the future of the firm

5. No uncertainty - all investors compose decisions by using the similar discounting rate at all time that is required rate of return (r) = cost of capital (k).

Posted Date: 1/31/2013 2:30:13 AM | Location : United States







Related Discussions:- Mm dividend irrelevance theory, Assignment Help, Ask Question on Mm dividend irrelevance theory, Get Answer, Expert's Help, Mm dividend irrelevance theory Discussions

Write discussion on Mm dividend irrelevance theory
Your posts are moderated
Related Questions
Financial Instruments in Money Market or Discount Markets Financial Instruments in Money market involve as: 1. Commercial paper 2. Bills of exchange 3. Treasury bills

Management of Account Receivable In order to keep current customers and attract new ones, most firms find it necessary to offer credit. Accounts receivable represents the exte

Financial Intermediaries These are institutions that link or mediate between the investors and savers: Some examples of financial intermediaries are as follow: 1. Comme

1. Find the price of the following bonds. They are all risk-free, and the risk-free rate is 10%. (a) A fifteen-year zero coupon bond with face value $1,000. (b) A three year

Solutions - Shareholders and Management Conflict Conflicts between management and shareholders may be resolved as follows like: 1. Pegging or attaching managerial compens

Types of Partners 1. General Partners -Unlimited active and liability in participation in partnership activities. 2. Limited partners - Limited liability in the management of

discuss the flow of fund in an open economy

Acceptance Rule of Accounting Rate of Return or ARR ARR procedure will accept those projects whose ARR is higher rather than that set with management or with bank rate and it

MM Dividend Irrelevance Theory Such was advanced via Modigliani and Miller in 1961.  The theory asserts to a firm's dividend policy has no effect on cost of capital and on its

i have the information given but i am having trouble getting the income statement done correctly