Underpricing Homework Help


Finally, the MM hypothesis would also not be valid when conditions are a to be uncertain because of the prices at which the firms can sell shares to raise funds to investment programmed consequent upon the distribution of earnings to the shareholders irrelevance argument would valid provided the firm is able to sell shares to replace dividend the current price. Since the shares would have to be offered to new investors, the firm Gill shares only at a price below the prevailing price. It is rightly contended by interline equilibrium price of shares will decline as the firm sells additional stock to replace dividends, underpricing or sale of shares at prices lower than the current market price implies that will have to sell more shares to replace the dividend. The firm would be better off by retains profits as opposed to paying dividends.

Under conditions of uncertainty, therefore, the MM doctrine of irrelevance does not hold To recapitulate the preceding discussion, in the context of market imperfections and under situations, shareholders are not indifferent between retained earnings and current divide considerations that support the proposition that investors have a systematic preference for dividend relative to retained earnings are (i) desire for current income, (ii) resolution of the allied aspect of informational content of dividends, (iii) transaction and income costs, and (iv) underpricing of new shares. The more favourable tax treatment of dividend relative to capital gains favours distribution of earnings. The empirical evidence re effect of dividends on the market price of shares is only suggestive. Yet, it is indicative of the fact that companies behave as if dividends are relevant. The MM hypothesis, therefore, is untenable.


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