Know Why Modigliani Miller Model Is Important for Exams

Modigliani Miller Model is one of the most important dividends out of three. However, it is not quite simple to understand about it without having a proper grip on the various concepts along with the fundamentals.

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What do you mean by Modigliani Miller Model?

This theory of dividend is also known as MM theory and according to this the dividend of a firm does not influence the affluence of a shareholder. They also explain that whatever is the value of a firm, that depends on earning of that firm through a policy of its investment.

In this case, if the investment is provided completely for a firm’s, then there is no need to evaluate the value of that firm. Splitting up of dividends for all shareholders and retaining of the business is not necessary for finding out the value of M.

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What are the different assumptions of Modigliani-Miller Model?

Assumptions of MM model are as followed –

• A company or firm operates in an appropriate capital market.
• No existence of Taxes is there
• There is always a fixed policy for any investment.
• The uncertainty of risk does not take place and thus, predictions or the assumptions of future prices and thus the value of r is equal to k and k t. Here, t is used for all.

How the rate of return can be calculated with the proper formula?

The exact formula is calculated as

Now, it is clear that how price per share is important. In case of r = k,

P0 = (D + P1) / (1 + r). Or, it can be P0 = (D + P1) / (1 + k)

Evaluation of the different situation is important and thus discount rate r will be similar to all shares. It must be divided the whole amount with equal dividend’s amount.

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