Question #26
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 10
Status: Unattempted
Correct Answer: A
Question
In a world with taxes and brokerage costs:
Answer Choices:
A. Modigliani and Miller say that dividend policy is relevant
B. dividend policy may be relevant
Explanation
Modigliani and Miller assume a world without taxes and transaction costs. They (correctly)
claim that the validity of their theory should be judged on empirical tests, not the realism
of their assumptions. Myron Gordon and John Lintner have championed the "bird-in-the-
hand" theory, which gives greater value to firms with high dividend yields because
investors perceive dividends to be less risky than capital gains.