Modigliani and Miller disagreed with the proposal by Gordon

Modigliani and Miller disagreed with the proposal by Gordon and Lintner regarding dividends. Why?

M&M claimed that many, if not most, investors will spend their dividends on consumer goods.

M&M claimed that many, if not most, investors will reinvest their dividends in the same or similar manner that the firms would.

M&M claimed that many, if not most, investors would prefer capital gains.

M&M claimed that firms only attract investors who would prefer dividends.

Solution

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1.An intuitive understanding of MM dividend irrelevance from the concept of a homemade dividend. Means an investor can sell of their shares to generate cash flow.

2. If there are taxed on dividend then investor preper Capital Gain.