Erin and Mia are finance researchers and are discussing the Modigliani and Miller (MM) dividend irrelevance theory. Based on your understanding of MM’s argument and the impact of the assumptions applied to the argument, fill in the missing parts of their conversation. ERIN: Modigliani and Miller (MM) dividend irrelevance theory is based on several assumptions. However, in the real world, these assumptions don’t apply. MIA: True. Issuance or flotation costs impact dividend policy decisions, and companies do care about whether to retain earnings or distribute dividends. ERIN: You are right, Mia. Due to the issuance costs with new equity sales, companies tend to make earnings retention or dividend payout more desirable. MIA: If a company pays out dividends and needs funds to invest in profitable projects, it would need to generate capital through new stock issues, which is less or more expensive than using internal cash flow.
Erin and Mia are finance researchers and are discussing the Modigliani and Miller (MM) dividend irrelevance theory. Based on your understanding of MM’s argument and the impact of the assumptions applied to the argument, fill in the missing parts of their conversation. ERIN: Modigliani and Miller (MM) dividend irrelevance theory is based on several assumptions. However, in the real world, these assumptions don’t apply. MIA: True. Issuance or flotation costs impact dividend policy decisions, and companies do care about whether to retain earnings or distribute dividends. ERIN: You are right, Mia. Due to the issuance costs with new equity sales, companies tend to make earnings retention or dividend payout more desirable. MIA: If a company pays out dividends and needs funds to invest in profitable projects, it would need to generate capital through new stock issues, which is less or more expensive than using internal cash flow.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter21: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 3MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....
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Erin and Mia are finance researchers and are discussing the Modigliani and Miller (MM) dividend irrelevance theory. Based on your understanding of MM’s argument and the impact of the assumptions applied to the argument, fill in the missing parts of their conversation.
ERIN: Modigliani and Miller (MM) dividend irrelevance theory is based on several assumptions. However, in the real world, these assumptions don’t apply.
MIA: True. Issuance or flotation costs impact dividend policy decisions, and companies do care about whether to retain earnings or distribute dividends.
ERIN: You are right, Mia. Due to the issuance costs with new equity sales, companies tend to make earnings retention or dividend payout more desirable.
MIA: If a company pays out dividends and needs funds to invest in profitable projects, it would need to generate capital through new stock issues, which is less or more expensive than using internal cash flow.
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