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Hello John,
I hope you are doing very well.
Can you explain to me about dividend irrelevancy theory (M&M)
Also if its available in video lectures, Please let me know where
Thanks.
Thank You Sir
I think its good explanation but i failed to find the assumptions that M&M made.
I am having bit problem in understanding that company could pay any level of dividend and if it had insufficent finance that could be make up by issuing new equity, how will that not effect the share price of a company? I understand that M&M theory is based on assumption of perfect capital markets. But still in a perfect capital market if they pay high level of dividends by issuing new equity. Will that not effect the share price?
By new equity do we consider right issues? if we do than TERP does change share price?
I don’t know why you are writing about issuing new equity. Although this could be the case that is not the main thrust of dividend irrelevancy at all.
What they are getting at is what I have written in the lecture notes – that they can pay high dividends but that will mean low dividend growth, or they can pay low dividends and that will mean high dividend growth. In theory it will not affect the shareholders.
Sir in Speciemen Paper Question 5b they asked about wheather the dividend policy will affect the share price.
In Solution Examiner has briefly written about dividend irrelevancy theroy and its assumptions. Some of it i dont really understand 🙁
How can they pay high level of dividends by issuing new equity? and assume it wont effect the share price? what kind of theory and assumption is that?
Sir the first three lines says:
Miller and Modigliani showed that, in a perfect capital market, the value of a company depended on its investment decision
alone, and not on its dividend or financing decisions. In such a market, a change in dividend policy by DD Co would not
affect its share price or its market capitalisation.Best is to watch the video on the following page:https://ceopedia.org/index.php/Dividend_irrelevance_theory
It explains with a little example how the share price will stay unchanged (on the M&M assumptions)
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