According to M-M, under a perfect market situation, the dividend policy of a firm is irrelevant, as it does not affect the value of the firm. They argue that the value of the firm depends on the firm’s earnings, which results from its investment policy. Thus, when investment decision of the firm is given, dividend decision –the split of earnings between dividends and retained earnings- is of no significance in determining the value of the firm
M-M constructed their arguments on the following assumptions:
• Perfect capital markets: The firm operates in perfect capital markets where investors behave rationally, information is freely available to all and transactions and flotation costs do no exist. Perfect capita; markets also imply that no investor is large enough to affect the market price of a share.
• No taxes: taxes do no exist or there are no differences in the tax rates applicable to capital gains and dividends. This means that investors value a rupee of dividend as much as a rupee of capital gains.
• Investment opportunities are known: the firm is certain with its investment opportunities and future profits.
for details please visit- http://www.mbachannel.blogspot.in/2014/05/modigliani-miller-mm-supports.html
Distributed by Blogger Widgets
No comments:
Post a Comment