... proposition states that the dividend policy affects only the allocation between ordinary income and capital gain, and has no effect on the total gain to the shareholders. In a perfect capital market the shareholders can effectively undo the firms dividend strategy. If a shareholder receives greater dividends than desired, he or she can reinvest the excess, Conversely, if a shareholders receive a smaller dividend than desired than he or she can sell off the extra shares of stock. This argument is due to MM and is similar to their homemade-leverage concept. However MM argument is useful in introducing the concept of dividend, it ignores many factors in practice. It rests on several assumptions. It does not take into account the real world factors like the personal taxes and the costs involved with the issue of news shares. It assumes the condition of free capital markets. The leftist school of thought have a ...

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