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    Understanding a firms market value

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    I need to understand better what is the basis for the view that a firm's total market value is invariant to its choice of dividend policy? I would like to cite three broad types of capital market imperfections that might cause the dividend policy of a firm to have an effect on the value of that firm.

    © BrainMass Inc. brainmass.com December 24, 2021, 10:38 pm ad1c9bdddf
    https://brainmass.com/business/dividends-stock-repurchase-and-policy/market-value-dividend-policy-496430

    SOLUTION This solution is FREE courtesy of BrainMass!

    The basis for the view that a firm's total market value is invariant to its choice of dividend policy can be defined by Modigliani-Miller Theorem. The theorem states that under perfect market condition the market value of the firm is not affected by the decision of the firm to declare its dividend or not. The perfect market is based under certain assumption and these assumptions are:
    (i) The investors behave rationally
    (ii) No scope for default or bankruptcy
    (iii) Zero tax environments
    (iv) No transaction cost
    (v) Equal information to all investors at no cost
    If all these assumptions are met the dividend policy will have no impact on the value of the firm.
    But in real world this is not the case. Imperfections in the market prevail and these imperfections affect the value of the firm with its dividend policy. Following are the three imperfections that affect the value of the firm with its dividend policy:
    (i) Attitude of investors towards risk: Investors attitude towards risk differ and this makes them differ on their dividend expectations and due to this the market value of the firm get affected if the company changes its dividend policy.
    (ii) Personal Tax: Dividend payments play a big role for an investor when it comes to personal tax. Many countries have low tax rate on dividend income. Therefore the investors chose a fir that adopts a dividend policy that suits their tax bracket and due this the market value of the firm get affected as the change in dividend policy attracts or repeal investors.
    (iii) The clientele effect: According to this imperfection, different investors have different preference towards dividend. Some like more dividend whereas some prefer more capital gains and due to this the value of the firm get affected.

    Works Cited
    1. Sheeba, K. (2011). Financial Management. Pearson Education India.

    Regards
    Jayant Kumar

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 10:38 pm ad1c9bdddf>
    https://brainmass.com/business/dividends-stock-repurchase-and-policy/market-value-dividend-policy-496430

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