Dividend policy and optimal level of debt

Reference no: EM1337288

Modigliani and Miller have postulated that dividend policy is basically irrelevant in that if a firm is growing (share value would demonstrate this) then an internal dividend is created and the investor may sell shares to capture this dividend.

1. Do you agree with this statement? Why or why not?

2. What difference might it make to an investor if the dividend is either in cash or in shares of stock?

3. What impact does a share split have on the valuation of a firm?

Using debt has tax advantages for a firm, but there is a trade-off with regard to debt service (interest payments on accrued debt).

1. If you were a member of senior management for Johnson & Johnson, what factors might you consider when deciding upon an optimal level of debt?

2. What metrics (ratios or other quantitative measures) might assist you in this consideration?

Reference no: EM1337288

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