Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1. As per Modigliani and Miller's perfect world - A lower dividend payout doesn't reduce company's cost of capital. 2. However, as per the Dividend

1. As per Modigliani and Miller's perfect world - A lower dividend payout doesn't reduce company's cost of capital.

2. However, as per the Dividend capitalization model (Cost of Equity = (Dividend per Share/ Current Market Value of Stock) + Growth Rate of Dividend), the cost of equity goes down if dividend is lowered (since dividend is at numerator in this formula).

In this formula, there is no tax or agency cost considered. Isn't there a contradiction between #1 and #2?

Is there a list of steps available by Modigliani and Miller that indicates that lower dividend payout doesn't reduce company's cost of capital.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets and Institutions

Authors: Jeff Madura

12th edition

9781337515535, 1337099740, 1337515531, 978-1337099745

More Books

Students also viewed these Finance questions

Question

Identify and explain the four assumptions that underlie IFRS.

Answered: 1 week ago

Question

Explain how the value of perfect information is determined. L01

Answered: 1 week ago