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Why market value of firm is not effected by dividend decision
Financial Management
Why market value of firm is not effected by dividend decision as per MM approach
Answers (5)
In perfect capital markets, investors are assumed to be rational and to have all the information they need to make investment decisions. They are indifferent between dividends and capital gains, as they can reinvest dividends to earn capital gains or sell a portion of their shares to create cash flow. Therefore, the amount of dividend paid by a company does not affect the value of the company, as investors can create their desired cash flows by selling a portion of their shares or reinvesting the dividends. In addition, the MM approach assumes that the dividend payout policy of a company does not affect the investment opportunities available to the company. The value of a company is determined by the expected future cash flows that it generates, and the dividend payout policy does not affect the expected future cash flows of the company. Therefore, the market value of a company is not affected by the dividend decision.
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