MM dividend policy intro slide

MM meets dividends

Say there is a firm which wants to pay a dividend in excess of its cash flow (CF).  To do this, it can  either borrow money, which assuming perfect capital markets, is a transaction with a NPV = 0. Or, if it wants to pay a smaller dividend, it can spend a certain amount of its Net CF on repurchasing equity So the firm can choose any Payout policy it desires, funding the policy through share issues/repurchases;  hence dividend policy is irrelevant

Shareholder indifferent to Div.Pol.

through appropriate purchases/sales of shares, they can replicated any div.pol. they wish. Hence they won't value a firm paying particular div,pol. different to any other firm - only such that, firm value does not depend on dividend

Should Div.Pol. Matter?

MM’s logic is very simple: A dividend is quite simply a way for a firm to put cash in its shareholders’ pockets.However, shareholders do not need dividends to get cash in their pocket.  They can simply sell shares to get cash.  Thus, rational investors will not pay higher prices for firms with higher dividend payouts