This is because a firms value comes from the

Info iconThis preview shows page 1. Sign up to view the full content.

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

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,...
View Full Document

Ask a homework question - tutors are online