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Miller and Modigliani - Essay Example
Author : ethelkemmer
Finance & Accounting
Pages 3 (753 words)
Dividends refer to the share of an organization’s net profit that is given to its shareholders. An organization’s normal shareholders usually benefit from a given rate of dividend that is generated from the profits. …
The higher the company is able to retain earnings, the lesser the dividends and the lower the retention, the larger the dividends. Finance managers then need to make a wise decision on dividends payments and investment fuelling funds from the net profit of the firm. Since the overall goal of doing business is profit maximization, organizations must know which of the two practices is better in terms of wealth creation. If it will not lead to wealth creation for the shareholders, the funds should be retained to support investment programmes. A conflict therefore arises on whether dividends payment impacts the value of the organization or not. Some critics argue that dividends are irrelevant in that the percentage paid to the shareholders does not impact the value of the business while others maintain that dividends are relevant as far as the value of the organization is concerned (Baker,2009). Modigliani and Miller Hypothesis (MM Hypothesis) Both are on the idea that dividends are irrelevant in that they have no effect on the organization’s value and do not have serious repercussions on the firm. According to them, choosing an investment programme that will contribute to the firm’s profit is what is important in adding value to the business. ...