How do Miller and Modigliani (M&M) arrive at their conclusion that dividend policy is irrelevant in a world of frictionless capital markets? Why is the assumption of fixed investment policy crucial to this conclusion?
Answer to relevant QuestionsDuring the late 1960s, the top marginal personal income tax rate on dividends, received by British investors, reached 98 percent, yet dividend pay-outs actually increased. How can you justify this empirical fact? Assume you are the sole owner of a profitable, private U. S. corporation. What do you think would be the most tax- efficient method of receiving owner-ship income (via salary, perks, retained earnings, or dividends)? How does the fraction of NASDAQ-listed companies that pay regular cash dividends compare to the fraction of NYSE-listed firms that regularly pay dividends? What accounts for this difference? Current asset accounts, especially cash and inventory, usually increase at a rate slightly less than the growth rate in sales. Why? If true, what is the implication of this fact for the sustainable growth model? What are the key variables to consider when evaluating the benefits and costs of changing credit standards? How do these variables differ when evaluating the benefits and costs of changing credit terms?
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