0
The MM approach to irrelevance of dividend is based on the following assumptions:
- · The capital markets are perfect and the investors behave rationally.
- · All information is freely available to all the investors.
- · There is no transaction cost.
- · Securities are divisible and can be split into any fraction. No investor can affect the market price.
- · There are no taxes and no flotation cost.
- · The firm has a defined investment policy and the future profits are known with certainty. The implication is that the investment decisions are unaffected by the dividend decision and the operating cash flows are same no matter which dividend policy is adopted.
The model
Under the assumptions stated above, MM argue that neither the firm paying dividends nor the shareholders receiving the dividends will be adversely affected by firms paying either too little or too much dividends. They have used the arbitrage process to show that the division of profits between dividends and retained earnings is irrelevant from the point of view of the shareholders. They have shown that given the investment opportunities, a firm will finance these either by ploughing back profits of if pays dividends, then will raise an equal amount of new share capital externally by selling new shares. The amount of dividends paid to existing shareholders will be replaced by new share capital raised externally.
In order to satisfy their model, MM has started with the following valuation model.
P0= 1* (D1+P1)/ (1+ke)
Where,
P0 = Present market price of the share
Ke = Cost of equity share capital
D1 = Expected dividend at the end of year 1
P1 = Expected market price of the share at the end of year 1
With the help of this valuation model we will create a arbitrage process, i.e., replacement of amount paid as dividend by the issue of fresh capital. The arbitrage process involves two simultaneous actions. With reference to dividend policy the two actions are:
- · Payment of dividend by the firm
- · Rising of fresh capital.
With the help of arbitrage process, MM have shown that the dividend payment will not have any effect on the value of the firm. Even if the firm pays dividends, resulting in a increase in market value of the share, the effect on the value of the firm will be neutralised by the decrease in terminal value of the share.
What else can I help you with?
What are the assumptions of cox regression?
The assumptions of cox regression are a constant relationship and the proportional hazards assumptions.
What artists did the song mm- mm- mm- mm- mm- mm in the 1960's?
The song "Mm Mm Mm Mm Mm Mm" was released in 1964 by Wayne Fontana and the Mindbenders.
What are the assumptions of probit analysis?
The assumptions of Probit analysis are the assumption of normality and the assumption for linear regression.
What does 167mm equal to in mm?
167 mm in mm is 167 mm.
Is 6.3 mm or 3.5 mm larger or smaller?
6.3 mm is greater than 3.5 mm
What is liberal approach?
Liberals champion a humanistic and nonmilitary approach to
What are the assumptions of the Modigliani Miller approach?
The Modigliani Miller approach assumes that it does not matter how a business or corporation is financed.
What is meant by suspended assumptions?
Suspended assumptions refer to temporarily setting aside or putting on hold certain beliefs or preconceived notions when exploring new ideas or perspectives. It can help individuals approach a situation with an open mind and evaluate different possibilities without being constrained by previous assumptions.
What psychodynamic approach attempts to help people correct mistaken assumptions or feelings about themselves and to overcome their feelings of insecurity?
Adlerian Theory
A cylindrical object of height 150 mm and diameter 100 mm is delivered at location P1 by a conveyor?
300, 350 and 200 mm in the positive X, Y and Z directions respectively from P1.Write a program for picking and placing the object, make suitable assumptions. Consider it is Cartesian Robot.
What assumptions can you make in other cultures?
It is important to avoid making assumptions about other cultures, as they can lead to misunderstandings and stereotypes. It is best to approach different cultures with an open mind, curiosity, and a willingness to learn and understand their unique beliefs, customs, and practices.
Is planning be impossible without assumptions?
Yes, planning is virtually impossible without assumptions, as they provide the necessary framework for decision-making and forecasting. Assumptions help identify potential risks, resources, and outcomes, allowing planners to create a more structured approach. Without them, plans would lack direction and clarity, making it difficult to set goals or anticipate challenges. Ultimately, assumptions serve as the foundation upon which effective planning is built.
What is the difference between the classical and statistical approaches?
The classical approach in statistics relies on mathematical formulas and assumptions to make predictions, while the statistical approach uses data analysis and probability to make predictions based on observed patterns.
How do you distinguish between scientific and nonscientific hypotheses?
Scientific hypothesis can be understand by scientific approach (using scientific methods & formulae etc) Nonscientific hypothesis is based on assumptions only.
What are the assumptions of cox regression?
The assumptions of cox regression are a constant relationship and the proportional hazards assumptions.
Assumptions in cardinalist approach in consumer behavior?
In the cardinalist approach in consumer behavior, one assumption is that consumers can rank their preferences for different goods and services. Another assumption is that consumers make rational and consistent choices based on these preferences. Additionally, this approach assumes that consumer utility can be measured numerically and compared across different choices.
Making assumptions about students?
Making assumptions about students can lead to misunderstandings and hinder their academic and personal growth. Such assumptions often stem from stereotypes or preconceived notions based on a student's background, appearance, or behavior. It's crucial for educators and peers to approach each student as an individual, recognizing their unique strengths and challenges. By fostering an inclusive environment that values diversity, we can better support all students in reaching their full potential.
