What Does the Modernist (Modigliani and Miller) View of Dividend

question 16

Multiple Choice

What does the Modernist (Modigliani and Miller) view of dividend policy say about a higher payout ratio if taxes are ignored?

• A) It will produce a higher share value as shareholders can choose between reinvestment in the company or investment at a higher rate elsewhere.
• B) It will not impact share value as investors can get cash from their shares even if there is no dividend distributed.
• C) It will reduce the share value as there will be less cash for the company to invest in income-generating projects maximizing net present value (NPV).
• D) It will not impact share value as investors are indifferent as to whether they receive cash today or cash in the future.
• E) It will reduce share value as investors seek long term holdings to avoid transactions costs.

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Definitions:

Accommodated Party

In finance, the party for whom a loan or credit extension is made, usually facilitated by the guarantee or cosigning by another party.

Ratification

The formal approval or confirmation of an act or agreement that was signed but not yet authorized.

Unauthorized Agent

An individual who acts on behalf of another without having the legal or official permission to do so.

Principal

The amount of money that is originally invested or loaned, prior to interest or profit.