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.

Expert Solution

Modigliani Miller theory (also known as MM approach) is the theory which proved that dividends are not relevant to investors. Irrespective of whether a company pays a dividend or not, the investors are capable enough to make their own cash flows from the stocks depending on their need for the cash. If the investor needs more money than the dividend he received, he can always sell a part of his investments to make up for the difference. Likewise, if an investor has no present cash requirement, he can always reinvest the received dividend in the stock. Thus, the Modigliani – Miller theory firmly states that the dividend policy of a company has no influence on the investment decisions of the investors.

This theory also believes that dividends are irrelevant by the arbitrage argument. By this logic, the dividends distribution to shareholders is offset by the external financing. Due to the distribution of dividends, the price of the stock decreases and will nullify the gain made by the investors because of the dividends.

jeff jeffy 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. Next, describe three real-world factors that may cause one dividend policy to be preferable to another.

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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