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Understanding a firms market value

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I need to understand better what is the basis for the view that a firm's total market value is invariant to its choice of dividend policy? I would like to cite three broad types of capital market imperfections that might cause the dividend policy of a firm to have an effect on the value of that firm.

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This solution is comprised of an explanation of how a firm's market value is invariant to its dividend policy.

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The basis for the view that a firm's total market value is invariant to its choice of dividend policy can be defined by Modigliani-Miller Theorem. The theorem states that under perfect market condition the market value of the firm is not affected by the decision of the firm to declare its dividend or not. The perfect market is based under certain assumption and these assumptions are:
(i) The investors behave rationally
(ii) No scope for default or bankruptcy ...

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Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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