{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

When Are Dividends Irrelevant - When Are Dividends...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
When Are Dividends Irrelevant? (The Miller Modigliani Proposition) There is a school of thought that argues that what a firm pays in dividends is irrelevant and that stockholders are indifferent about receiving dividends. Like the capital structure irrelevance proposition, the dividend irrelevance argument has its roots in a paper crafted by Miller and Modigliani. The Underlying Assumptions The underlying intuition for the dividend irrelevance proposition is simple. Firms that pay more dividends offer less price appreciation but must provide the same total return to stockholders, given their risk characteristics and the cash flows from their investment decisions. Thus, there are no taxes, or if dividends and capital gains are taxed at the same rate, investors should be indifferent to receiving their returns in dividends or price appreciation. For this argument to work, in addition to assuming that there is no tax advantage or disadvantage associated with dividends, we also have to assume the following: There are no transactions costs associated with converting price appreciation into cash, by selling stock. If this were not true, investors who need cash urgently might prefer to receive dividends. Firms that pay too much in dividends can issue stock, again with no flotation or transactions costs, to take on good projects. There is also an implicit assumption that this stock is fairly priced. The investment decisions of the firm are unaffected by its dividend decisions, and the firm s operating cash flows are the same no matter which dividend policy is adopted. Managers of firms that pay too little in dividends do not waste the cash pursuing their own interests (i.e., managers with large free cash flows do not use them to take on bad projects).
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern