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
Say that a buyer of bonds values good bonds at $500 and values bad bonds at $250. Sellers of both good and bad bonds value them at $350. If the fraction of good sellers and bad s

Illustrate in brief about the Investment  Process A  typical  investment  decision  undergoes  a  five  step  procedure which, in turn, forms the foundation of investment pr

what will happen to the loss on account of premium redemption of debenture through sinking fund? Where do i close this account to?

Elephant Company common stock has a beta of 1.2. The risk-free rate is 6% and the expected market rate of return is 12%. Determine the required rate of return on the security.

From the following cost, production and sales data of Decors Motor Ltd., prepare comparative income statement for three years under (i) absorption costing method, and (ii) marginal

Important Factors for Expectation Theory The following circumstances are essential for the expectation theory to hold. i) Ideal capital markets exists where there are many

Define the term Placement - Methods of Floating New Issues Under this method, issue houses or brokers purchase the securities outright with the intention of placing them wi

Imagine Joy is the manager of a bank named Money Talks Bank of Virginia . This bank has recently issued new loans to customers. Joy wants you, the business analyst to prepare a re

Agency Theory An agency relationship arises whether one or more parties identified the principal contracts or hires another identified an agent to perform on his behalf some

1. Using the variance-covariance matrix (∑) and the expected return vector (er) given in the appendix, calculate the set of weights that correspond to the portfolio that maximizes