MM's assertion that dividend policy will not affect the value of the firm requires that dividend policy does not:
A) alter the retained earnings of the firm.
B) affect investment and borrowing policies.
C) allow the payout ratio to change.
D) alter the number of outstanding shares.

Question

Quizplus · Accepted Answer

According to MM's theory, dividend policy does not affect the value of the firm as long as investment and borrowing policies are unchanged. This means that if the company decides to pay out more dividends, it can do so by reducing investment or increasing borrowing to maintain its capital structure. Therefore, the answer is B. The other options (A, C, and D) can potentially affect the value of the firm and are not consistent with MM's assumptions.

MM's Assertion That Dividend Policy Will Not Affect the Value