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:

Imported

Pertains to goods or services brought into one country from another for the purpose of sale.

Global Competition

Exists when firms originate, produce, and market their products and services worldwide.

Market Share

The percentage of total sales volume in a market captured by a brand, product, or company.

Domestically

Pertaining to or occurring within a country's borders; not foreign or international.