The manager of XYZ Corp. feels that a dividend increase will increase the stock price because many investors value stock with a dividend-discount model. Why might MM disagree with this assertion?
A) The increased dividend makes the firm much riskier.
B) Future dividend growth may slow due to lower retained earnings.
C) Investors prefer capital gains over dividends.
D)Dividend increases will increase the book value but not the market value of the firm.

Question

Quizplus · Accepted Answer

MM theory suggests that in perfect capital markets, the value of the firm is determined by its underlying assets and not by its dividend policy. Therefore, a dividend increase will not necessarily lead to an increase in the stock price. In fact, MM would argue that the value of the firm may decrease if future dividend growth slows down due to lower retained earnings.

The Manager of XYZ Corp