Dividend Decision in Business Finance : Practice MCQ Questions & Answers with Explanations

The correct answer is B: Independent of its dividend policy.

The Modigliani-Miller hypothesis (1961) states that in a perfect capital market (no taxes, no transaction costs, rational investors), a firm's value is determined entirely by its earning power and the risk of its underlying assets, not by how it distributes earnings. Shareholders are indifferent between dividends and capital gains.