1.
According to the Modigliani-Miller (MM) hypothesis, the value of a firm is:
A
Dependent on its dividend policy
B
Independent of its dividend policy
C
Maximised when dividend payout is 100%
D
Determined solely by retained earnings
View Answer
Correct Answer: B — Independent of its dividend policy
Explanation:
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.