This preview shows page 1. Sign up to view the full content.
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...
View Full Document
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.
- Spring '11