Dividend Irrelevance Theory

Question 1

What happens in a tax-free world?

Answer 1

Shareholders are indifferent between dividends and capital gains

Question 2

How is value of company solely determined>

Answer 2

By earning power of its assets and investments

Question 3

What does dividend irrelevancy theory imply?

Answer 3

The dividend policy does not matter

Question 4

Assumption of dividend irrelevance theory?

Answer 4

No taxes exist
Capital markets are perfectly efficient
No transaction costs
Information is fully and freely available

Question 5

What is meant by an efficient capital market

Answer 5

Funds will always be available to finance +NPV investments

Question 6

Issue with assumption no taxes exist?

Answer 6

As rates usdually differ, creating preference for either high dividend or high earnings retention

Question 7

Issue with assumption of efficient capital market?

Answer 7

Funds are not always available to finance +NPV investments

Question 8

Issue with no transaction costs?

Answer 8

There are transaction costs on the sale of shares

Question 9

Issue with information fully and freely available?

Answer 9

Investors often aren’t fully aware of future investment plans and expected profits as they’re not directors

Question 10

What is bird-in-hand theory?

Answer 10

Prefer a current dividend to future capital gains because future is more uncertain