In a Modigliani and Miller world with no taxes, a 100% equity financed company has generated £1m cash flows this year. Consider three alternative policies: 1) pay £1m to shareholders as dividends, 2) buy back £1m worth of shares, 3) retain all cash flows. Determine which of the following statements is correct. The company's value is higher under policy 1 The company's value is higher under policy 2 Shareholders are indifferent between all three policies Shareholders are indifferent between policy 1 and policy 2, but prefer both policies to policy 3
Dividend Policy
A dividend is a part of the profit paid to the shareholder in an organization. The management of the organization has the right to decide the policy for giving a dividend from the earnings to the shareholder. However, an organization is not in the obligation to declare a dividend for the investor. Dividend policy differs from organization to organization. As the management has the only authority to decide dividend rate, dividend amount, and time of dividend payout by considering all other elements that create an impact on the payment of a dividend.
Stocks And Dividends
Stock or equities are generally sold and bought in the Stock Exchange or which is popularly known as the stock market. Stocks are issued in the Stock Exchange for the sole purpose of raising funds for the Corporation or the company itself. Now since an individual has purchased a portion of the Corporation or company, he or she may claim to be a part of the earnings or profit of the company.
In a Modigliani and Miller world with no taxes, a 100% equity financed company has generated £1m cash flows this year. Consider three alternative policies: 1) pay £1m to shareholders as dividends, 2) buy back £1m worth of shares, 3) retain all cash flows. Determine which of the following statements is correct.
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The company's value is higher under policy 1 |
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The company's value is higher under policy 2 |
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Shareholders are indifferent between all three policies |
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Shareholders are indifferent between policy 1 and policy 2, but prefer both policies to policy 3 |
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