Crux of the Argument
The crux of the MM position on the irrelevance of dividend is arbitrage argument. The arbitrage process involves a switching and balancing operation. In other words. arbitrage refers to entering simultaneously into two transactions which exactly balance completely offset each other. The two transactions here are the acts of paying out dividends raising external funds either through the sale of new shares or raising additional loans to firm investment programmed. Assume that a firm has some investment opportunity. Given its investment decision, the firm has two alternatives: (i) it can retain its earnings to finance the investment programmer; (ii) or distribute the earnings to the shareholders as dividend and raise an amount externally through the sale of new shares bonds (or the purpose. If the firm selection second alternative arbitrage process is involved, in that payment of dividends is associated.