Signalling hypothesis

It is a theory that explains a change in the stock price as a result of some announcement. It is the announcement of dividend increase are an indication of good future growth.

>True

According to Modigliani and Miller each shareholder can construct his or her own dividend policy.

MM dividend irrelevance theory also implies that the shareholders are indifferent between dividends and capital gains.When a shareholder gets dividend he can either spend for consumption or invest it. On the other hand, if the dividend is not paid,even then the market value of shares will increase. This happens because retained earnings increase and the company doesn't raise funds either through equity or debt. Increase in market value means capital appreciation.If the shareholder doesn't require income for current consumption,his earnings are automatically invested by the company on his behalf.If he requires income now ,he can sell the capital appreciation portion of his investment in the equity shares of the company.Thus the payment or non-payment of dividend doesn't affect the shareholders in anyway.

>Less

Modigliani and Miller also pointed out that many institutional investors do not pay taxes and can buy and sell stocks with very low transaction cost.For these investors, dividend policy is less relevant than for an individual investor.

MM theory is based on the assumptions that there are either no taxes and no or very low transaction cost.