If the Modigliani and Miller Hypothesis About Dividends Is Correct,and

question 52

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 D₁/P₀ = a + b(g))would be equal to +1.0.
• D) None of the above statements is true.
• E) All of the above statements are true.

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Definitions:

Mutually Exclusive

A statistical term describing events that cannot occur at the same time, implying no overlap in their outcomes.

Event A

A specified occurrence or result in a probabilistic framework that is subject to study or analysis.

Event B

A term used in probability theory to denote a specific outcome or set of outcomes from a stochastic experiment.

0 ≤ P ≤ 1

A mathematical expression indicating that the value of P (probability) ranges from 0 to 1, inclusive.