We stated in Section 17.3 that MM's proof of dividend irrelevance assumes that any new shares are

Question:

We stated in Section 17.3 that MM's proof of dividend irrelevance assumes that any new shares are sold at a fair price. Consider the case in Problem 16 in which Hewlard Pocket pays the higher dividend of $2 a share and replaces the cash by issuing new stock. Suppose that the new shares are sold in a public issue at $8 a share, which is below the market price after the $2 dividend is paid. What is the loss suffered by the existing shareholders? Is dividend policy still irrelevant? Why or why not?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...