Kepling is correct. According to Modigliani and Miller’s dividend irrelevance theory, a stock holder can effectively create their own dividend policy by buying or selling a firm’s stock to get the combination of cash flow and ownership they want to receive. Note that Modigliani and Miller’s theory only holds in a perfect world with no taxes or brokerage costs. Montgomery is also correct. According to Gordon and Lintner’s “bird-in-the-hand theory,” a dollar of dividends is less risky than a dollar of capital gains. Since dividends are less risky, a company that pays dividends will cause its cost of equity to decrease. Since the cost of equity declines, the required return for the investor will also decline, which will result in a higher P/E ratio |
