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Modigliani and Miller (MM) Argued That Dividend Policy Is Irrelevant

Question 55

Multiple Choice

Modigliani and Miller (MM) argued that dividend policy is irrelevant.On the other hand, others, such as Gordon and Lintner (GL) , argued that dividend policy does matter.GL's argument rests on the contention that


A) rs = Modigliani and Miller (MM) argued that dividend policy is irrelevant.On the other hand, others, such as Gordon and Lintner (GL) , argued that dividend policy does matter.GL's argument rests on the contention that A) r<sub>s</sub> = /P<sub>0</sub> + g is constant for any dividend policy. B) Because of perceived differences in risk, investors value a dollar of dividends more highly than a dollar of expected capital gains. C) Investors, because of tax differentials, value a dollar of expected capital gains more highly than a dollar of dividends. D) Most investors will reinvest rather than spend dividends, so it would save investors' money (taxes) if corporations simply reinvested earnings rather than paid them out as dividends. E) None of the above. /P0 + g is constant for any dividend policy.
B) Because of perceived differences in risk, investors value a dollar of dividends more highly than a dollar of expected capital gains.
C) Investors, because of tax differentials, value a dollar of expected capital gains more highly than a dollar of dividends.
D) Most investors will reinvest rather than spend dividends, so it would save investors' money (taxes) if corporations simply reinvested earnings rather than paid them out as dividends.
E) None of the above.

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