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Dividends are irrelevant. Discuss? This essay addresses the issue of dividend policy. Dividend policy is one of the most controversial issues of corporate finance. There are three broad and divergent views surrounding the controversial question of: Do dividends increase the value of the firm, Is dividend policy relevant? The prevailing idea before the seminal work by Modigliani and Miller (MM) was that increased dividend payouts increase firm value and dividends are important. However later MM argued that a firm's value is decided by the success of its investments and not by how it pays dividends. A more radical view suggests that in view of the differential taxation of dividends and capital gains, dividends will reduce the firm's value as they are taxed at a higher rate and hence argue that the dividend policy is important. These three divergent views are further discussed in detail in the essay. Case for the low dividend...

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