CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

According to Miller and Modigliani, the value of the firm is determined by

I. the dividend payout ratio.
II. the earnings retention ratio.
III. its future earnings power.
A. III only
B. II and III
C. I, II and III
Explanation: Under the MM assumptions there is no meaningful distinction between dividends and share repurchases - they are both ways for a company to return cash to shareholders.

User Contributed Comments 5

User Comment
danlan MM is the dividend payout irrelevant theory
Gigem Miller and Modigliani published 2 papers:
In 1958, Proposition 1 said that dividends were irrelevant in a world with no taxes.

In 1963, Proposition 2 said that in a world with taxes, dividends did matter because of taxes, and the optimal capital structure was determined by a tradeoff between the tax savings of interest and the increase in interest rate do to default risk.

The question should read: according to MM Prop 1, or according to MM dividend irrelevance theory, not just generally "according to MM"
nike according to the textbook, MM is equivalent to the dividend irrelevance theory. I don't think we are supposed to know the proposition 2 part for the exam.
SPM1089 Gigem,
Is MM Proposition 2 the same as the "static trade-off theory" or am I confusing the two?
rjdelong so why doesn't the internal use of funds into positive NPV investments count as better for shareholders than a dividend? how can MM overlook that aspect, what I mean is that retention ratio has more implications than only share repurchases...
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