ACCA FM · Chapter 10 · Question 8 of 11
According to Modigliani and Miller's dividend irrelevance theory, which of the following is correct?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) In a perfect capital market, the value of a company depends on its investment decisions, not on its dividend policy
Explanation
MM argued that in a perfect market with no taxes or transaction costs, shareholders are indifferent between dividends and capital gains because they can create 'home-made dividends' by selling shares. Company value is therefore determined by the returns on its investments. The 'bird in the hand' argument that investors prefer dividends is the opposing view.
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