[Latest News][6]

Affiliate Marketing Guides
Agriculture Business Ideas
Amazon Online Store Tips
Banking & Finance Tips
Blogging & Webmaster Guides
Bulk SMS Short Code Guides
Computer & IT Business Ideas
Education Business Ideas
Entrepreneurship Tips & Freebies
Facebook Autopilot & Tips
Fashion & Decoration Ideas
Financial Calculators
Fiverr Income Guides
Free SMS Text Messages
Google Adsense Tips
Health Business Opportunities
Inspirational Poems & Literature
Insurance & Risk Management
Job Search Tips
Mobile Phone Tips & Business
Motivational Quotes & Tips
Oil & Gas Business Ideas
Online Business Guides
Online Importation Business Guides
Small Scale Business Ideas
Social Media Income Guides
Start-Up Business Ideas
Transportation & Haulage Ideas
Web & Graphic Designing Ideas
Work-At-Home Business Ideas

Modigliani and Miller’s Approach

Modigliani and Miller’s Approach

According to MM, under a perfect market condition, the dividend policy of the company is irrelevant and it does not affect the value of the firm. “Under conditions of perfect market, rational investors, absence of tax discrimination between dividend income and capital appreciation, given the firm’s investment policy, its dividend policy may have no influence on the market price of shares”.

Assumptions Of Modigliani and Miller’s Approach:

MM approach is based on the following important assumptions:

1. Perfect capital market.

2. Investors are rational.

3. There are no tax.

4. The firm has fixed investment policy.

5. No risk or uncertainty.

Proof for MM approach

MM approach can be proved with the help of the following formula:

Po = D1 + P1 / 1 + Ke

Where,

Po = Prevailing market price of a share.

Ke = Cost of equity capital.

D1 = Dividend to be received at the end of period one.

P1 = Market price of the share at the end of period one.

finance
[Post Image Courtesy of StockImages at FreeDigitalPhotos.net]

P1 can be calculated with the help of the following formula.

P1 = Po (1+Ke) – D1

The number of new shares to be issued can be determined by the following formula:

M × P1 = I – (X – nD1)

Where,

M = Number of new share to be issued.

P1 = Price at which new issue is to be made.

I = Amount of investment required.

X = Total net profit of the firm during the period.

nD1= Total dividend paid during the period.

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

No comments:

Post a Comment

Do you have any reasonable comments for this post ? Please feel free to drop them below using the comment box. We will moderate and publish them as soon as possible. Cheers !

Start typing and press Enter to search