Modigliani and Miller suggest that the value of a firm is NOT affected by the firm's dividend policy,due to ________.

Question

Quizplus · Accepted Answer

Modigliani and Miller concluded that the dividend policy of a firm does not affect its value under certain assumptions. One of these assumptions is the absence of taxes and transaction costs. Another crucial assumption is the presence of a clientele effect, which holds that investors have specific preferences for dividend payments. Some investors may prefer high dividends and are attracted to firms that pay high dividends regularly. Other investors may prefer capital gains and are attracted to firms that reinvest their earnings instead of paying dividends. The existence of different groups of shareholders with different preferences for dividends means that a firm's value is not affected by its dividend policy as long as the firm maintains a consistent dividend payout policy that satisfies the preferences of its shareholders.

Modigliani and Miller Suggest That the Value of a Firm