[amp_mcq option1=”Issue of Debentures” option2=”Issue of Bonus Share” option3=”Arbitrage” option4=”Hedging” correct=”option3″]<\/p>\n
The correct answer is C. Arbitrage.<\/p>\n
The Modigliani-Miller (MM) theorem, also known as the dividend irrelevance theory, states that in a perfect market, the value of a company is not affected by its dividend policy. This is because investors can always create their own dividend policy by buying or selling shares of the company.<\/p>\n
Arbitrage is the practice of buying and selling assets in different markets to profit from small differences in prices. In the context of the MM theorem, arbitrageurs would buy shares of a company that pays a high dividend and sell shares of a company that pays a low dividend. This would drive the prices of the shares towards equality, and the value of the company would not be affected.<\/p>\n
The MM theorem is based on a number of assumptions, including perfect capital markets, no taxes, and no transaction costs. In reality, these assumptions do not hold true, and the dividend policy of a company can have an impact on its value. However, the MM theorem is still a useful tool for understanding the relationship between dividends and share price.<\/p>\n
The other options are incorrect because they are not based on arbitrage. Option A, issue of debentures, is a way for a company to raise money by borrowing money. Option B, issue of bonus shares, is a way for a company to give its shareholders additional shares in the company. Option D, hedging, is a way to reduce risk by offsetting one investment with another.<\/p>\n","protected":false},"excerpt":{"rendered":"
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