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







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