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Question 9.A.10: To what extent is catering theory consistent with MM theory?

To what extent is catering theory consistent with MM theory?

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Not at all. We have seen that, according to MM, the dividend decision has no effect on shareholder wealth. As a result, no dividend policy is better than any other. Thus, if shares of dividend-paying businesses trade at a premium, or at a discount, they are being mispriced by investors. (A key assumption of MM is that investors act in a rational manner.)

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