Q. Miller Approach of irrelevance of dividends?
Discuss the Modigliani as well as Miller Approach of irrelevance of dividends. What are its drawbacks?
Ans. Modigliani with Miller Approach (MM Model) :- The most well-known theory in support of irrelevance of dividends as well as value of the firm is provided by Modigliani and Miller. The root of the hypothesis is that the dividend policy of a firm is a passive decision which doesn't affect the value of the firm. The dividend policy is a outstanding decision which depends upon the availability of investment opportunities to the firm. There are two circumstances:
(i) If a firm has adequate investment opportunities it will not pay dividends and retain the earnings to finance them.
(ii) On the contrary if there are insufficient investments opportunities dividends will be declared to distribute the earnings.