Modigliani and Miller (MM)argued that dividend policy is irrelevant.On the other hand,others,such as Gordon and Lintner (GL),argued that dividend policy does matter.GL's argument rests on the contention that A) r_s = /P₀ + g is constant for any dividend policy. B) Because of perceived differences in risk,investors value a dollar of dividends more highly than a dollar of expected capital gains. C) Investors,because of tax differentials,value a dollar of expected capital gains more highly than a dollar of dividends. D) Most investors will reinvest rather than spend dividends,so it would save investors' money (taxes)if corporations simply reinvested earnings rather than paid them out as dividends. E) None of the above.

Question

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Gordon and Lintner argued that investors value a dollar of dividends more highly than a dollar of expected capital gains due to perceived differences in risk. They believe that the consistency of dividend payment and growth is important to investors, and that a cut or omission of dividends may signal financial distress. This theory is known as the dividend irrelevance theory. Option A refers to the constant growth model, which is not relevant to the question of dividend policy. Option C is not consistent with GL's argument, as it suggests investors value capital gains over dividends. Option D is relevant to the cost of reinvestment, but not to the value of dividends versus capital gains. Option E is incorrect as there is a valid answer.

Modigliani and Miller (MM)argued That Dividend Policy Is Irrelevant