In the absence of taxes, transaction costs, or changes in a firm's operating or investment policies
A) the greater the payout ratio, the greater the share price of the firm.
B) the price of a share of stock is not affected by dividend policy.
C) the firm should retain earnings so stockholders will receive a capital gain.
D) the firm should pay a dividend only after current equity financing needs have been met.

Question

Quizplus · Accepted Answer

In the absence of taxes, transaction costs, or changes in a firm's operating or investment policies, the price of a share of stock is not affected by dividend policy. This is known as the dividend irrelevance theory as proposed by Modigliani and Miller. The theory states that investors are indifferent between dividends and capital gains because they can achieve the same return regardless of the firm's dividend policy. Therefore, the payout ratio does not affect the share price of the firm.

In the Absence of Taxes, Transaction Costs, or Changes in a Firm's