Modigliani and Miller (MM) Argued That Dividend Policy Is Irrelevant

question 7

Multiple Choice

Modigliani and Miller (MM) argued that dividend policy is irrelevant. On the other hand, Gordon and Lintner (GL) argued that dividend policy does matter. GL's argument rests on the contention that

• A) rs = D1/P0 + g is constant for any dividend policy.
• B) Because of perceived differences in risk, investors value a dollar of dividends more highly than a dollar of expected capital gains.
• C) Investors, because of tax differentials, value a dollar of expected capital gains more highly than a dollar of dividends.
• D) Most investors will reinvest rather than spend dividends, so it would save investors money (taxes) if corporations simply reinvested earnings rather than paid them out as dividends.
• E) None of the answers above.

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Definitions:

Conduction Deafness

Hearing loss that occurs when sound waves cannot be efficiently conducted through the outer ear canal to the eardrum and the tiny bones of the middle ear.

Eardrum

A thin membrane that separates the outer ear from the middle ear and vibrates in response to sound waves, enabling hearing.

Basilar Membrane

The basilar membrane is a critical component of the inner ear, situated within the cochlea; it plays a substantial role in the mechanical analysis of sound waves for hearing.

Cochlea

A spiral-shaped cavity in the inner ear, containing the organ responsible for converting sound waves into nerve signals perceived as sound by the brain.