Manag., July-2018 – Q26
- Option : B
- Explanation : Assumptions: The M-M hypothesis of the irrelevance of dividends is based on the following critical assumptions:
1. Perfect capital markets in which all investors are rational, Information is available to all free of cost, there are no transactions costs; securities are infinitely divisible, no investor is large enough to influence the market price of securities; there are no flotation costs.
2. There are no taxes. Alternatively, there are no differences in tax rates applicable to capital gains and dividends.
3. A firm has a given investment policy which does not change. The operational implication of this assumption is that financing of new investments out of retained earnings will not change the business risk complexion of the firm and, therefore, there would be no change in the required rate of return.
4. There is a perfect certainty by every investor as to future investments and profits of the firm. In other words, investors are able to forecast future prices and dividends with certainty. This assumption is dropped by MM later.
