Modigliani and Miller (MM) argued that dividend policy is irrelevant. On the other hand, Gordon and Lintner (GL) argued that dividend policy does matter. GL's argument rests on the contention that
A) rs = D1/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 answers above.

Question

Quizplus · Accepted Answer

Gordon and Lintner argue that investors value a dollar of dividends more highly than a dollar of expected capital gains because of perceived differences in risk. This means that dividend policy does matter, as it can affect how investors value the stock and ultimately impact the stock price.

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