Question

In a Modigliani and Miller world with no taxes, consider a firm paying £Z per share in dividends. An investor owns 100 shares and the ex-dividend share price is £100. Which one of the following is false?

If the investor does not need cash and wants to keep the amount invested in shares unchanged, he simply needs to buy a number Z of additional shares.

If the investor wants to have more than £100xZ in cash, he will just need to sell some of his shares

		The investor does not care about how much he holds in shares and how much he holds in cash
		The investor is indifferent between any Z chosen by the firm

Answer 1

Solution: The Answer is

If the investor does not need cash and wants to keep the amount invested in shares unchanged, he simply needs to buy a number Z of additional shares.

Explanation:

1) Option If the investor wants to have more than £100xZ in cash, he will just need to sell some of his shares is true because Under Modigliani and Miller share holders can sell their shares for cash and shares can split into any fraction.

2) Option The investor does not care about how much he holds in shares and how much he holds in cash is true because it is immaterial to shareholders about dividend payout as it has no consequence to the value of firm.

3) Option The investor is indifferent between any Z chosen by the firm is true because it is irrelevant for shareholders dividend payout or adding it equity capital