If the Modigliani and Miller Hypothesis About Dividends Is Correct $\frac { \tilde { \mathrm { D } } _ { 1 } } { \mathrm { P } _ { 0 } } = \mathrm { a } + \mathrm { b } ( \mathrm { g } )$

question 13

Multiple Choice

If the Modigliani and Miller hypothesis about dividends is correct, and if one found a group of companies which differed only with respect to dividend policy, which of the following statements would be most correct?

• A)The residual dividend model should not be used, because it is inconsistent with the MM dividend hypothesis.
• B)The total expected return, which in equilibrium is also equal to the required return, would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends.
• C)If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate, and then a scatter diagram (or regression) analysis were undertaken, then the slope of the regression line (or b in the equation \(\frac { \tilde { \mathrm { D } } _ { 1 } } { \mathrm { P } _ { 0 } } = \mathrm { a } + \mathrm { b } ( \mathrm { g } )\) ) would be equal to +1.0.
• D)None of the above statements is true.
• E)All of the above statements are true.

---

Definitions:

Degree of Operating Leverage

A financial ratio that measures the sensitivity of a company's operating income to its sales, indicating the potential for higher returns or risks.

Sales Decrease

A reduction in the quantity or value of items sold by a business within a particular period.

Financial Break-Even

Financial break-even is the point at which total revenues exactly cover total costs, leaving the business with neither profit nor loss, focusing on financial stability.

Initial Investment

The amount of money used to start a project, purchase an asset, or invest in a financial instrument, marking the beginning of the investment’s lifecycle.