It has been shown that in the absence of taxes and other market imperfections firm value...

It has been shown that in the absence of taxes and other market imperfections firm value will be unaffected by dividend policy. Explain the logic behind this conclusion. Next, describe three real-world factors that may cause one dividend policy to be preferable to another.

Expert Solution

The irrelevance theory by Miller & Modigliani have opined that price of Equity share of a firm depends solely on its Earning Power and is not influenced by the manner in which earning is split between dividend and retained earnings. They observed that under conditions of Perfect Capital Market, Rational Investors, absence of tax discrimination between dividend income and capital appreciation given the firms investment policy, its dividend policy have no influence on the Market price of the share. The Goverment imposing freeze on dividend according to MM Theory will have no impact on share price (Wealth of Shareholders). The shareholders will be deprived of dividend income but will be compensated by increase in the value of their shares. Capital Investment in real terms wont be affected by this action as it is neither in favour nor against Capital Investment. However firms will be raising lesser amount from the market as a part of requiremment of Capital for further investment will be available in the form of Retained Earnings.

The 3 real world factors that may cause one dividend policy preferable to other:-

a) Shareholders need cash to meet their household requirement so they expect annual reward for their investment

b) Income is as important as Capital Gain. Other form of Investment such as bank deposits, bonds etcfetch cash returns, therefore investors will shun company which do not pay appropriate dividend.

c) If Return on Equity is less than Cost of Equity, Shareholders will suffer in case of no payment of Dividend. Tax considerations sometimes may also be relevant. Foe example dividend might be tax free and Capital Gain might be taxable

ekkarill92 answered 1 year ago

It has been shown that in the absence of taxes and other market imperfections firm value...

It has been shown that in the absence of taxes and other market imperfections firm value will be unaffected by dividend policy. Explain the logic behind this conclusion in a paragraph or two.

It has been shown that in the absence of taxes and other market imperfections firm value...

It has been shown that in the absence of taxes and other market imperfections firm value will be unaffected by dividend policy. Explain the logic behind this conclusion in a breif paragraph.

As discussed in the text, in the absence of market imperfections and tax effects, we would...

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price: (P0 – PX) / D = (1 – TP) / (1 – TG) Here P0 is the...

As discussed in the text, in the absence of market imperfections and tax effects, we would...

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price: (P0 – PX) / D = (1 – TP) / (1 – TG) Here P0 is the...

As discussed in the text, in the absence of market imperfections and tax effects, we would...

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price:1 (P0 – PX)/D = (1 – TP)/(1 – TG) where P0 is the price just before...

As discussed in the text, in the absence of market imperfections and tax effects, we would...

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price:1 (P0 – PX)/D = (1 – TP)/(1 – TG) where P0 is the price just before...

As discussed in the text, in the absence of market imperfections and tax effects, we would...

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price: (P0 – PX) / D = (1 – TP) / (1 – TG) Here P0 is the...

As discussed in the text, in the absence of market imperfections and tax effects, we would...

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price: (P0 – PX) / D = (1 – TP) / (1 – TG) Here P0 is the price...

As discussed in the text, in the absence of market imperfections and tax effects, we would...

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price: (PO – PX) / D = (1 – TP) / (1 – TG) Here PO is the price...

As discussed in the text, in the absence of market imperfections and tax effects, we would...

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price: (P0 – PX) / D = (1 – TP) / (1 – TG) Here P0 is the...

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It has been shown that in the absence of taxes and other market imperfections firm value...

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