Not in a miller modigliani world in this world the

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Unformatted text preview: y, does that not increase the total return? Not in a Miller-Modigliani world. In this world, the expected price appreciation on this stock will drop by exactly the same amount as the dividend increase, say from 10% to 8%, leaving you with a total return of 12%. While there remain numerous adherents to this view, there are theorists who disagree by noting that a firm may signal its confidence in its future earnings by increasing dividends. Accordingly, stock prices will increase when dividends are increased and drop when dividends are cut. To complete the discussion, there are still others who argue that dividends expose investors to higher taxes and thus should reduce value. Thus, dividends can increase, decrease or have no effect on value, depending upon which of these three arguments you subscribe to. Dividends do not matter: The Miller Modigliani Theorem The basis of the argument that dividends don’t matter is simple. Firms that pay more dividends will offer less price appreciation and...
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This note was uploaded on 01/17/2012 for the course ECON 101 taught by Professor Econnorm during the Spring '11 term at Art Institutes Intl. Minnesota.

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