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
Define the direct finance and indirect finance in markets. In direct finance, borrower-spenders borrow funds directly by lenders into the financial markets through selling them


1.  Determine what is the future value of $20 a week for 10 (ten) years at 6 percent interest? Assume the first payment takes place at the end of this week. 2.  Kristina started


A bondholder buys a bond maturing in two years for Rs. 120 and earns Rs.15 per annum as interest. His YTM is ______ %.

Existence of Quantity Discounts Recurrently, the firm is capable to take benefits of quantity discounts.  Since these discounts affect the price per unit, they influence also

what are the main function of the derivative market

Stewardship Accounting Shareholders contribute capital that is provided to the directors that they employ and at the end of each accounting year render an explanation on the a

Functions of the Stock Exchange The essential function of a stock exchange is the raising of funds for investment in long-term assets. Whereas this basic function is very sign

Requirements for Raising Loan Requirements for Raising Loan are as follow: a) Subsidiaries of the company and History. b) Qualifications, ages, and names of the company's dire