Modigliani and Miller suggest that the value of a firm is not affected by the firm's dividend policy, due to ________.
A) the relevance of dividends
B) the clientele effect
C) the informational content
D) the optimal capital structure

Question

Quizplus · Accepted Answer

Modigliani and Miller's theory of dividend irrelevance suggests that the firm's dividend policy does not affect its value because investors can create their own desired cash flows through reinvestment or portfolio adjustment. This theory is based on assumptions such as perfect capital markets and no taxes or transaction costs, which allow for the clientele effect (where investors with different preferences for dividends self-select their investments) to not affect the firm's value. The informational content of dividends is also not considered relevant in this theory. The optimal capital structure is a separate concept that refers to the mix of debt and equity financing that maximizes a firm's value.

Modigliani and Miller Suggest That the Value of a Firm