medium · Principles of Finance time-value-of-money
According to the Dividend Irrelevance Proposition by Miller and Modigliani, why does the payout policy not affect firm value in perfect markets?
- Dividends received by shareholders are always taxed at precisely the same rate as capital gains.
- Companies that consistently pay dividends are perceived by the market as inherently more financially stable.
- Investors rationally prefer dividends today because they provide 'bird in the hand' certainty over uncertain future capital gains.
- Any dividend paid reduces the firm's cash, which must be offset by issuing new shares, keeping shareholder wealth constant.
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