If the Modigliani and Miller hypothesis about dividends is correct,and if one found a group of companies which differed only with respect to dividend policy,which of the following statements would be most correct? A) The residual dividend model should not be used,because it is inconsistent with the MM dividend hypothesis. B) The total expected return,which in equilibrium is also equal to the required return,would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends. C) If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate,and then a scatter diagram (or regression)analysis were undertaken,then the slope of the regression line (or b in the equation D₁/P₀ = a + b(g))would be equal to +1.0. D) None of the above statements is true. E) All of the above statements are true.

Question

Quizplus · Accepted Answer

The Modigliani and Miller hypothesis about dividends states that the value of a firm is independent of its dividend policy, all else equal. Therefore, the dividend policy of a group of companies that differ only with respect to dividend policy should not affect their total expected return or required return. Thus, statement B is incorrect. The residual dividend model can still be used regardless of the validity of the MM hypothesis, so statement A is incorrect. Statement C is also incorrect because it assumes a linear relationship between dividend yield and growth rate, which is not always the case. Therefore, the correct choice is D, and none of the statements is true.

If the Modigliani and Miller Hypothesis About Dividends Is Correct,and