Outline reasons why Modigliani-Miller irrelevance of dividend policy may not hold. Explain what roles taxes, transaction...

Outline reasons why Modigliani-Miller irrelevance of dividend policy may not hold. Explain what roles taxes, transaction costs, and signalling play in theories of dividend policy.

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Expert Solution

The irrelevance of dividend policy will not hold because Taxes plays an important role in the overall capital structure of the company as they are also providing with tax deduction for debt holders as the interest payments are tax deductible.

There are bankruptcy costs also involved with debt holders as it could be example through various companies which have gone bankrupt after they could not service that debt.

there is a transaction cost also involved with the debt and equity both because overall recoveries are not possible and there are certain hair cuts also.

so this is not a perfect World this approach assumes, there is presence of transaction cost along with tax structure and bankruptcy costs are also involved.

Dividend policies in present world are relevant because a lot of companies pay dividend in order to gain the market confidence and they also pay dividend in order to ensure shareholders that the company is on a growth trajectory and have ample liquidity.

jeff jeffy answered 1 year ago

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