Under the idealized conditions of MM,which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares?
A) The new shares are worth less than the old shares.
B) The old shares drop in value to equal the new price.
C) The value of the firm is reduced by the amount of the dividend.
D) The value of the firm is unaffected.

Question

Quizplus · Accepted Answer

According to MM theory, the value of a firm is determined by its underlying assets and the risk of its cash flows, and is unaffected by the firm's dividend policy or the method used to finance dividends. Therefore, the issuance of new stock to pay dividends will not affect the value of the firm.

Under the Idealized Conditions of MM,which Statement Is Correct When