The Modigliani and Miller dividend irrelevance theorem is based on the argument that:
A)Dividends are preferred to capital gains
B)Dividends and capital gains are perfect substitutes
C)Capital gains are preferred to dividends
D)Investors don't value dividends, hence dividends are irrelevant

Question

Quizplus · Accepted Answer

The Modigliani and Miller dividend irrelevance theorem posits that the value of a firm is determined by its earning power and risk, and not by the way it chooses to distribute profits to shareholders. According to this argument, dividends and capital gains are perfect substitutes, meaning they have equal value to investors. Therefore, the choice between paying dividends or retaining earnings to generate capital gains does not affect the overall value of the firm.

The Modigliani and Miller Dividend Irrelevance Theorem Is Based on the Argument