The manager of XYZ Corp.feels that a dividend increase will increase stock price because many investors value stock with a dividend-discount model.Why might MM disagree with this assertion?
A)the increased dividend makes the firm much riskier.
B)future dividend growth may slow due to less retained earnings.
C)investors prefer capital gains over dividends.
D)dividend increases will increase the book value but not the market value of the firm.

Question

Quizplus · Accepted Answer

Modigliani and Miller (MM) argue that the payment of dividends has no impact on a firm's stock price as investors can create their own dividend streams by selling a portion of their holdings. Additionally, they argue that dividend policy has no impact on the firm's value as long as investment opportunities are profitable, implying that an increase in dividends would reduce the amount of retained earnings available for future growth opportunities, potentially slowing future dividend growth. Therefore, MM would disagree with the assertion that a dividend increase will increase stock price.

The Manager of XYZ Corp