Unformatted text preview: be replicated by selling shares,
investors will not pay higher prices for firms with higher dividend payouts. Download free ebooks at bookboon.com
71 Corporate Finance Corporate ﬁnancing and valuation To understand the intuition behind the MM-argument, suppose that the firm has settled its investment
programme. Thus, any surplus from the financing decision will be paid out as dividend. As case in point,
consider what happens to firm value if we decide to increase the dividends without changing the debt level.
In this case the extra dividends must be financed by equity issue. New shareholders contribute with cash
in exchange for the issued shares and the generated cash is subsequently paid out as dividends. However,
as this is equivalent to letting the new shareholders buy existing shares (where cash is exchanged as
payment for the shares), there is not effect on firm value. Figure 11 illustrates the argument:
Figure 11: Illustration of Miller and Modigliani's dividend irrelevance proposition Dividend financed
by stock issue No dividend and
no stock issue New stockholders New stockholders Shares
Cash Firm Shares Cash
View Full Document
This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12