Question

Explain the nature of Miller and Modigliani’s theory on dividend policy and outline its practical limitations.

(Explanation for an essay question, give examples of practical limitations)

Answer 1

According to millent and Mooligilia w noclegi qui millen theory way butosposed by rainco mooliselians anel mathron millen in 1961 they are suggesting there livieronals and capital gain are equivalent when an investout Consloers return on investment. so accordli uy to this theory once the investmeal policy ý k neocon to the investoot he will not need any additional imput on diviclevel wistory of the Company the Millet theory goes a stel Futher awl illustrates the fooracticcel situation where divielenels are not to levent to investory intespective or whether a compeny pery a diviclenel out not the investors are Capable oneonesh to make their own Cash Ilony Iwon the stocke deponding on their need fout the cush. if the investor neede mare mowy their the liviele rol he received, he can always sell a part of the investment to make up for the cliff arenee. the modigliani - millen theory flomly States thert the diviele nel policy of a compay hey no influence on the investime ut decisione of the investore this theory also belives that diviolene ame irurele vent by the arbitrage sary argument. By this loogle , the alivielends distribution to Sherro ballery

Pajano is offest by extent wel Finanel my. the mooligilia w Miller theowy is beyed on the Followy cy assumptions: • porfect Subital markets • No Taxes Fixed invertime at policy 110 Risk of uncertainty Wille 8 moohlig ligw diviele ned that move thein he expected then he ean wo- invest in the company stock with the guaplus cash flow