Miller and Modigliani Proclaim That,under Certain Ideal Conditions,dividend Policy Is

question 36

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 in 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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Definitions:

Selling Price

The amount charged to customers for goods or services, determining the revenue generated from sales.

Sales Volume

The number of units of a product sold in a particular period, indicative of the level of demand and operational success.

Net Operating Income

A company's income after operating expenses are subtracted but before deducting taxes and interest charges.

Selling Price

The sum charged to consumers for a product or service.