Question 10.2: Which of the following statements lends support to dividend ...
Which of the following statements lends support to dividend irrelevance rather than to dividend relevance?
(a) Investors prefer the certainty of dividends to the uncertainty of capital gains
(b) Companies build up a clientele of shareholders due to their dividend policy
(c) Dividends are believed to signal information about the company
(d) Taxes distort the desirability of dividends relative to capital gains
(e) Shareholders can make their own dividends by selling some of their shares
The correct answer is (e). The argument that shareholders could manufacture their own dividends by selling off part of their shareholding was used by Miller and Modigliani in 1961 to argue that the dividend policy of a company was irrelevant. All of the other points can be used to support a case for dividends having an effect on the value of the equity shares of a company.