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
For the set of activities shown in the table below, draw the total expenses vs. time curve using the following data: The labor rates are as follows: Labor # 1 (L1) rate = 30

Berick Ltd is a relatively small engineering company that manages to compete effectively with larger companies by adapting to changing market requirements and specialising in innov

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

Example of Replacement of Assets Estate Developers purchased a machine five years ago on a cost of £7,500.  The machine had a probable economic life of 15 years at the moment

Acceptance Rule of IRR IRR will accept a venture if its IRR is higher than or equivalent to the minimum required rate of return such is usually the cost of finance also recogn

Buying Shares of a Company Factors should be refer when Buying Shares of a Company 1. Economic situation of the country and other non-economic factors as like unfavorable c

Who is Floor Broker Floor brokers aren't many in number. They execute orders for fellow  members  and  receive  a  share  brokerage  commission  charged  by  a commission broke

Government - Measuring Business Performance Government The Government is interested particularly in utility companies as KPLC, KPTC and such will offers public services -

After carefully reading all the available information, prepare a two page (double-spaced) essay and answer the following questions: Assume that we have the following data: C=100+0.

Spot transaction hedge/Money market hedge There are three parts to this question. Please answer all parts. The Chicken Company, a company with headquarters in Switzerland, has a r