Explain the logic of Modigliani and Miller's (MM) dividend irrelevance theorem and state all its underlying assumptions.
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Question:
Explain the logic of Modigliani and Miller's (MM) dividend irrelevance theorem and state all its underlying assumptions. Is it true that any amount of dividend payments are irrelevant to firm valuation and investor wealth in the Modigliani and Miller framework? Does the MM dividend irrelevance hold if the firm chooses to issue debt instead of equity to finance additional dividends? (8 pts)
b) Relax any one of the assumptions under Modigliani and Miller and show how this will impact the dividend irrelevance result. (4 pts)
c) Explain the concept of the clientele effect pertaining to the dividend policy and Miller and Scholes' argument for dividend irrelevance. Do you agree with Miller and Scholes?
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