1.
Modigliani and Miller's (M-M) Dividend Irrelevance Theory suggests that a firm's dividend
policy has no effect on its stock or its cost of capital. According M-M and assumptions in their
model, what does determine the firm's stock or its cost of capital? Check all that apply. The
firm's business risk The firm's capital structure The basic earning power of the firm's
operations The firm's financial risk Suppose an investor owned Suppose an investor owned a
stock that didn't pay dividend income from her investment. How did M-M suggest the investor
could create her own dividend policy? Use some of her other money to buy more shares in the
stock Sell some of her stock in the company Buy short-term Treasury bills Buy bonds from the
same company
Solution
Solution.
1.
Answer is the basic earning power of firm operetion.
Because MM theory talles that if firm has high growth power and plan for future, there market
value is high and also its stock prices would be high. If investors do not see future growth
probablity in a firm, the market value of that firm would not be that great
2. Use some of her other money to buy more share in the stock.