CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

One key assumption of the Miller and Modigliani dividend irrelevance argument is that:

A. Future stock prices are certain.
B. There are no capital gains taxes.
C. New shares are sold at a fair price.
Correct Answer: C

User Contributed Comments 9

User Comment
sarath What is the dividend irrelevance argument...
americade i think that either 100% debt or 100% equity depending on whether there are tax benefits
katybo page 543. Dividend irrelevance says that dividend policy has no effect on either value or cost of capital. Firm value is only determined by its earnings power or business risk. The critical assumptions are brokerage cost and taxes.
cntosg So what about B?
kodali The thoery says that investors can form their own dividend policy by either selling or buying additional shares. It works only when the stock is fairly priced based on the earnings of the firm.
rhardin It also only works if there are no taxes. So I still don't understand why B is not an acceptable answer.
VenkatB If "There are no capital gains taxes", then investors would prefer the company to retain the earnings instead of paying them as dividends..
joywind I guess if B is "no taxes at all" it should be right. Like VenkatB said, simply no capital gains taxes is not enough.
gregsob2 good point joy
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