Miller and Modigliani Proclaim That, Under Certain Ideal Conditions, Dividend

question 90

Essay

Miller and Modigliani proclaim that, under certain ideal conditions, dividend policy is irrelevant. What is it that they are specifically proclaiming to be irrelevant? Explain with the following example. Assume that a firm has $100,000 in assets at market value, no debt, and 100 shares outstanding. Further, $10,000 of the assets are cash which represents the recent net income of the firm. Now the firm can choose whether to pay out, say, a 50% dividend which will necessitate the issuance of $5,000 in new shares, or to pay no dividend and plow back all $10,000 of earnings into a project with an attractive NPV.

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