On 4 January 2006 Cockatoo Bakeries Ltd announced its preliminary earnings report to the market, that EPS was expected to be 29.5 cents per shares for the financial year 2005/2006. On 4 January 2006 Cockatoo Bakeries' shares closed trading at $1.15. On 18 January 2006 the company announced the payment of a 6 cent interim dividend fully franked and its shares closed trading that day at $1.25. On 4 March 2006 Cockatoo Bakeries shares closed trading at $1.29. On 5 March 2006 Cockatoo Bakeries shares began trading ex- dividend. The majority of Cockatoo Bakeries shareholders choose to receive their dividend payments via electronic funds transfer and this transfer was made on 24 May 2006. Cockatoo Bakeries is subject to a company tax rate of 30%.
-What does the dividend irrelevance proposition suggest will be the impact on shareholder wealth if a company funds an increase in dividends by issuing new shares?

Question

Quizplus · Accepted Answer

The dividend irrelevance proposition, as proposed by Modigliani and Miller, suggests that the method of financing a dividend (whether through retained earnings or issuing new shares) does not affect shareholder wealth in a perfect market, assuming no taxes, transaction costs, or other market imperfections.

On 4 January 2006 Cockatoo Bakeries Ltd Announced Its Preliminary