Suppose a firm that has been earning $2 and paying a dividend of $1.00, or a 50% dividend payout, announces that it is increasing the dividend to $1.50. The stock price then jumps from $20 to $30. Some people would argue that this is proof that investors prefer dividends to retained earnings. Miller and Modigliani would agree with this argument.
Answer the following statement true (T) or false (F)
False
Rationale: MM would disagree. They would say that investors took the dividend increase as a signal that the firm's management expected higher future earnings. MM say dividends have information content regarding future earnings.
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