CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Under Modigliani-Miller (MM) dividend irrelevance hypothesis, which of the following assumptions is part of the model?
MM's dividend irrelevance theory assumes perfect capital markets with no taxes, no flotation costs and no transaction costs. Investors are rational and indifferent between dividends and capital gains, and the firm's investment policy is fixed, so dividend policy does not affect firm value.
- APerfect capital markets with no taxes or flotation costsCorrect
- BCorporate taxes are higher than personal taxes on dividends
- CInvestors prefer current dividends to future capital gains
- DFirm's investment policy changes with each dividend decision
Explanation
MM assume perfect capital markets, rational investors, no taxes, no flotation or transaction costs, and a fixed investment policy. The other options contradict these assumptions: MM say investors are indifferent between dividends and capital gains, and investment policy is held constant.
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