In a perfect market,dividend policy has no effect on shareholders' wealth because:
A)transactions are costless.
B)any cash paid out as dividends must be replaced by issuing additional shares.
C)directors fix share prices during dividend announcements.
D)any cash paid out as dividends can be costlessly replaced by issuing new shares.

Question

Quizplus · Accepted Answer

In a perfect market, all information is available to investors and there are no transaction costs or taxes. Therefore, any cash paid out as dividends can be costlessly replaced by issuing new shares without affecting shareholders' wealth.  Option A is incorrect because transactions are not costless in reality. Option B is incorrect because a company can use its profits to pay dividends without issuing new shares. Option C is incorrect because directors do not fix share prices during dividend announcements, as share prices are determined by supply and demand in the market.

In a Perfect Market,dividend Policy Has No Effect on Shareholders