In the theoretical world of Miller and Modigliani

Question

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In the theoretical world of Miller and Modigliani, dividends are important only for their informational content. This means that investors can use dividend payments as a signal of the company's financial health, but that overall dividend policy does not affect shareholder wealth. The theory also assumes perfect capital markets, where investors can buy and sell stocks without any transaction costs, tax considerations, or other frictions. In such a world, the optimal financing decision for a firm would be to invest in all positive net present value projects, regardless of whether they are funded with equity or debt, because the market would value the firm based on its expected cash flows rather than on its capital structure or dividend policy. Therefore, neither paying dividends nor retaining earnings would affect the firm's overall value or the shareholders' returns.

In the Theoretical World of Miller and Modigliani