Modigliani and Miller (MM) on the one hand and Gordon and Lintner (GL) on the other have expressed strong views regarding the effect of dividend policy on a firm's cost of capital and value.

a. In essence, what are the MM and GL views regarding the effect of dividend policy on the cost of capital and stock prices?

b. How does the tax preference theory differ from the views of MM and GL?

c. According to the text, which of the theories, if any, has received statistical confirmation from empirical tests?

d. How could MM use the information content, or signaling, hypothesis to counter their opponents'

arguments? If you were debating MM, how would you counter them?

e. How could MM use the clientele effect concept to counter their opponents' arguments? If you were debating MM, how would you counter them?

AppendixLO1