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CS Executive · Corporate Accounting and Financial Management · Dividend Decisions

Which of the following is an assumption of the MM dividend irrelevance hypothesis?

MM assume perfect capital markets in which there are no transaction or flotation costs, no taxes, and investors are rational and have equal access to information. Options involving taxes, costs or signalling contradict these assumptions.

  1. AInvestors pay higher tax on capital gains than on dividends
  2. BFlotation costs are significant when new shares are issued
  3. CPerfect capital markets with no transaction costs and rational investorsCorrect
  4. DManagement follows a fixed dividend policy to signal earnings

Explanation

MM assume perfect capital markets, rational investors, no taxes, no flotation or transaction costs, and a fixed investment policy. Taxes and flotation costs being significant contradict the model, and signalling is not part of it.

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