If the three conditions of Modigliani and Miller hold, then dividend policy should not affect company value.

Question

Quizplus · Accepted Answer

According to Modigliani and Miller's theory, the value of a company is determined by its investment opportunities and the risk of its cash flows. Dividend policy, whether it is a high or low dividend payout, should not affect the company's value if the three conditions (perfect capital markets, no taxes, and no transaction costs) are met. This is because investors can create their own personalized dividend policy by selling shares if they prefer a higher dividend payout or holding onto shares if they prefer a lower dividend payout. Therefore, dividend policy is irrelevant in a perfect capital market, and it should not affect a company's value.

If the Three Conditions of Modigliani and Miller Hold, Then