Skip to content

CMA Intermediate · Financial Management and Business Data Analytics · Dividend Decisions and Dividend Theories

According to MM, if a firm pays a higher dividend and finances its investment by issuing new shares, what happens to the total value of the firm?

Firm value stays unchanged. Under MM, a higher dividend funded by new share issue reduces the ex-dividend price by the amount of the dividend, so shareholders gain in cash what they lose in share value. Value depends on earnings and investment decisions, not on payout.

  1. AIt rises because dividends signal strength
  2. BIt falls because of the lower retained earnings
  3. CIt remains unchanged because the value of existing shares falls by the dividend paidCorrect
  4. DIt rises because the cost of equity falls

Explanation

Under MM, extra dividends are offset by lower ex-dividend prices and by new shares issued at fair value. Shareholders' total wealth is unchanged, so firm value depends only on investment policy and earning power.

Did you get it right without looking?

One question tells you little. A timed set on Dividend Decisions and Dividend Theories shows your real accuracy, how long you take and where you lose marks.

Practise Dividend Decisions and Dividend TheoriesFree diagnostic mock

More Dividend Decisions and Dividend Theories questions