Preference for Current Income Homework Help

Preference for Current Income

The third aspect of the uncertainty question relating to dividends is based on the desire of investors for current income to meet consumption requirements, The MM hypothesis of irrelevance oi dividends implies that in case dividends are not paid, investors who prefer current income can sell a part of their holdings in the firm for the purpose. But, under uncertainty conditions, the two alternatives are not on the same footing because (i) the prices of  shares fluctuate so that the using price is uncertain, and (ii) selling a small fraction of holdings perilous Calls is inconvenient. That selling shares to obtain income, as an alternative to dividend, involves uncertain price and inconvenience. Implies that investors are likely to prefer current dividend. The MM proposition would, therefore, not be valid because investors are not indifferent.

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