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Unformatted text preview: deliver the same total return to
stockholders. This is because a firm’s value comes from the investments it makes – plant,
equipment and other real assets, for example – and whether these investments deliver high
or low returns. If a firm that pays more in dividends can issue new shares in the market,
raise equity and take exactly the same investments it would have made if it had not paid the
dividend, its overall value should be unaffected by its dividend policy. After all, the assets it
owns and the earnings it generates are the same whether it pays a large dividend or not.
You, as an investor, will also need to be indifferent between receiving dividends and
capital gains for this proposition to hold. After all, if you are taxed at a higher rate on
dividends than on capital gains, you will be less happy with the higher dividends, even 1 Miller, M. and F. Modigliani, 1961, Dividend Policy, Growth and the Valuation of Shares, Journal of Business, 411-433. 16
though your total returns will be the same,...
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- Spring '11