According to Modigilani & Miller (MM) theory which of the following statement is correct?

Dividend policy has no effect on value of firm

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Firm value depend on its investment policy instead of dividend policy

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Key assumption of MM theory is clientele effect

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All of the above

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Solution

The correct option is D All of the above
Clientele effect states that a firm will attract shareholders whose preferences for payment pattern and stability of dividend corresponds to the firm's payment patterns and stability of dividends.

Suggest Corrections

List-I	List-II
(a) Dividend Capitalization Approach	(i) Traditional Model
(b) Dividend Policy has a bearing on the share valuation	(ii) Gordon Model
(c) Stock Market places more weight on dividends than on retain earnings	(iii) Walter Model
(d) Dividend payout is irrelevant to the value of the firm	(iv) Modigliani and Miller Model