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

question 19

Multiple Choice

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

• A) r_s = /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 above.

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Definitions:

°C

A scale and unit of measurement for temperature where 0°C is the freezing point of water and 100°C is its boiling point at 1 atmosphere of pressure.

Atm

A unit of pressure, also known as atmosphere, approximately equal to the earth's atmospheric pressure at sea level.

Temperature

A measure of the average kinetic energy of the particles in a system, signifying how hot or cold the system is.

°C

Degrees Celsius, a unit of temperature on the Celsius scale, where 0°C represents the freezing point of water, and 100°C its boiling point at sea level.