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
effect of gdp in the domestic market

Given the following Present Value Plot for Projects A and B, which are mutually exclusive projects, answer the following questions: (i) What is the DCFROR for Project A? fo

You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 13 percent, which is pai

A paper mill produces two grades of paper viz., X and Y. Because of raw material restrictions, it cannot produce more than 400 tons of grade X paper and 300 tons of grade Y paper i

Development of Plastic Money in Middle Asia Motive behind the Fast Development of This Finance (Plastic Money) In Middle Asia a) High incidences of fraud via dishonest empl

Define Meaning of Investment Meaning of Investment: Investment involves making of a sacrifice in the present with hope of deriving future advantages. Investment has many

Review the budget below and answer the questions following the budget. FINANCIAL ACCOUNTING—STATEMENT OF REVENUE AND EXPENSES Statement of Revenue and Expenses for Group Practice f

Profitability Index or P.I. P.I. (benefit-cost ratio) = Present value of inflows / Present value of cash outlay Whether P.I. is greater than 1.0, invest and whereas less th

management and directors

models of solving externalities in 1) external sector 2)private sector