Question

What is mm hypothesis? Substantiate your answer with suitable propositions given by mm

Answer 1

Answer:

MM Hypothesis is stand's for Miller and Modigliani Hypothesis which is used to support the “dividend irrelevance theory. It will believe the investment policy to increase the values and share the importance of the payout for there shareholders.

For the dividends, there are irrelevant with no effects for the firms of share value. So to justify the arguments Miller and Modigliani have given proof in the form of the equation to clear the dividends determining the share price.

• Step 1: At the beginning, in market price and a share is equal to the present value for the dividends to receive the period in market place.

               P0 = [1/(1+ Ke)] * (D1 +P1)

• Step 2: nP0 = [1/(1+Ke)] * (nD1+nP1)
• Step 3: nP0 = [1/(1+Ke)] * [(nD1 + (n+ ∆n ) P1 – ∆P1)]
• Step 4: ∆nP1 = I – (E – nD1)
• Step 5: nP0 = [(n + ∆n) P1 – I + E] / (1+Ke)