The correct answer is D. All of the above.
The Modigliani-Miller (MM) model is a theory that states that in a perfect market, the value of a company is not affected by its dividend policy. This means that a company can either pay out its profits as dividends or reinvest them in the company, and the value of its stock will not change.
The MM model is based on the following assumptions:
- There are no taxes.
- There are no transaction costs.
- There are no information asymmetries.
- Investors are rational.
- Investors have homogeneous expectations.
Under these assumptions, the MM model shows that the value of a company is equal to the present value of its future cash flows. The dividend policy does not affect the value of the company because investors can always sell their shares if they want to receive a cash flow.
However, in the real world, there are many factors that can affect the value of a company’s stock, including taxes, transaction costs, information asymmetries, and investor behavior. These factors can make it difficult to predict how a company’s stock price will react to a change in its dividend policy.
For example, if a company pays out a dividend, it will have less money to invest in its business. This could lead to lower future earnings and a lower stock price. However, if a company does not pay out a dividend, it may be seen as a less attractive investment by some investors. This could also lead to a lower stock price.
In conclusion, the MM model is a useful tool for understanding the theoretical relationship between dividend policy and stock price. However, it is important to remember that the MM model is based on a number of assumptions that do not always hold true in the real world. As a result, it is difficult to predict how a company’s stock price will react to a change in its dividend policy.