CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Which of the following best describes the Modigliani-Miller (MM) position on dividend policy in a perfect capital market?
MM hold that dividend policy is irrelevant to firm value in a perfect capital market. Value depends on earning power and investment decisions, and shareholders can create homemade dividends or reinvest, so the payout split does not change wealth.
- ADividend policy is irrelevant to the value of the firmCorrect
- BHigher dividends always raise the value of the firm
- CLower dividends always raise the value of the firm
- DDividend policy determines the firm's cost of debt
Explanation
MM argue that in perfect markets with no taxes or transaction costs, firm value depends on earning power and investment policy, not on how earnings are split between dividends and retention. Shareholders can create homemade dividends by selling shares.
Did you get it right without looking?
One question tells you little. A timed set on Dividend Decision shows your real accuracy, how long you take and where you lose marks.
More Dividend Decision questions
- Using Walter's model, Kiran Ltd has EPS of Rs 10, internal rate of return r = 15% and cost of equity ke = 10%. The dividend payout is 40%, s…
- Under Walter's model of dividend policy, a firm's market price per share is expected to be highest at a payout ratio of zero when the firm i…
- Which statement about stock splits and bonus shares is correct?
- Meera Ltd has EPS of Rs 20, a payout ratio of 60%, cost of equity of 10% and return on investment of 10%. Using Walter's model, what is the …
- A company's board decides to pay dividends from a fixed percentage of each year's profit rather than a fixed rupee amount. Which dividend po…
- Anand Textiles has expected earnings per share of ₹20, an internal rate of return r of 15% and a cost of equity Ke of 10%. Using the Walter …