- CFA Exams
- CFA Exam: Level II 2021
- Study Session 7. Corporate Finance (1)
- Reading 21. Analysis of Dividends and Share Repurchases
- Subject 1. Dividend policy and company value: theory
CFA Practice Question
One key assumption of the Miller and Modigliani dividend irrelevance argument is that:
B. There are no capital gains taxes.
C. New shares are sold at a fair price.
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 |