Modigliani and Miller Dividend Irrelevance states that in perfect capital markets, holding ________ policy fixed, the firm's choice of dividend policy is irrelevant and does not affect the initial share price.
A) debt
B) investment
C) interest rate
D) equity issuance

Question

Quizplus · Accepted Answer

According to Modigliani and Miller Dividend Irrelevance, in perfect capital markets where there are no taxes, transaction costs, or asymmetric information, the choice of dividend policy does not affect the initial share price. The only factors that do affect the initial share price are the level of investment and the amount of debt a company uses. Therefore, holding debt policy fixed, the firm's choice of dividend policy is irrelevant; hence, option A and D are incorrect. Interest rate only affects the cost of capital, but not the initial share price (which is determined by the company's investment and financing decisions).

Modigliani and Miller Dividend Irrelevance States That in Perfect Capital