If Modigliani and Miller’s dividend irrelevancy theory is correct, what is the impact on a firm’s cost of capital and share price if its dividend payout increases? Cost of Capital Share Price A) An increase A decrease B) None None C) None A decrease Your answer: C was incorrect. The correct answer was B) None None How come ? if dividend holders are getting higher dividends how come this is not compensated by a lower share price?
Max that’s the whole point of M&M - no impact on cost of capital related to selection of Debt vs Equity
Dividend irrelevance theory says that if investors are not getting enough dividends, they can sell some shares. If they feel they’re getting too much, they can use some of that to buy more shares. Hence, the irrelevance.
Thanks i misread the question
cant get it:S… any better explanation… i know the dividend irrelevance theory … cant understand the question…