2. Dividend preference theory (bird-in-the-hand theory) Despite some theoretical assertions, many investors do care a great deal about dividends. They believe that sure dividends today (a bird in the hand) are less risky than a return in the form of capital gains in the future. The following table lists some factors that might affect an investor's preference for dividends. Indicate whether the given factors are likely to make an investor prefer to receive more or fewer dividends. Investors Will Likely Prefer ... More Fewer Dividends Dividends Factor Investors expect a reliable annual cash flow from their stock portfolios. Dividends are taxed in the year in which they are received, whereas capital gains are taxed when the stock is sold. O Investors believe in the bird-in-the-hand theory. O Erin and Mia are finance researchers and are discussing the Modigliani and Miller (MM) dividend irrelevance theory. Based on your understanding of MM's argument and the impact of the assumptions applied to the argument, fill in the missing parts of their conversation. ERIN: Modigliani and Miller (MM) dividend irrelevance theory is based on several assumptions. However, in the real world, these assumptions don't apply. MIA: True. If the transaction cost assumption is removed, then investors do care about how they receive their gains from their investment, capital gains or dividends. their holdings to satisfy ERIN: You are right, Mia. According to MM's theory, investors who own low- or nondividend paying stocks could current income requirements. the investor's MIA: But in the real world, Erin, this is not a fair assumption. Transaction costs with each trade activity will earnings leading investors toward preferring regular dividends