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256 Corporate Finance BRILLIANT’S

Since the shareholders are indifferent, the d¡ëW \$_© Ho$ â`yMa {S>{dS>oÝS> {S>grOZ Ûmam à^m{dV
wealth would not be affected by the future Zht hmoVrŸ&
dividend decision of the firm.
The MM hypothesis will be valid even if O~ B{ŠdQ>r H¡${nQ>c Ho$ ~Om` S>oãQ> Ho$ ê$n _| EŠgQ>Z©c
external funds are raised in the form of debt \$ÊS²>g àmá {H$E JE hmo V~ ^r MM hm`nmo{W{gg d¡Y
instead of equity capital. This is because of the _mZr OmEJrŸ& Eogm {cdaoO go gå~pÝYV B{ŠdQ>r Ed§ S>oãQ>
indifference between debt and equity with
respect to leverage. Ho$ _Ü` CZH$s VQ>ñWVm Ho$ H$maU hmoJmŸ&
Finally, the arbitrate process will ensure A§VV:, Am{~©Q´>oQ> àmogog `h gw{ZpíMV H$aVr h¡ {H$
that under conditions of uncertainty also the A{ZpíMVVm H$s pñW{V`m| _| ^r {S>{dS>oÝS> nm°{cgr
dividend policy would be irrelevant. When Aàmg§{JH$ hmoJrŸ& O~ H$moB© Xmo \$åg© {~OZog [añH$,
two firms are similar in respect of business â`yMa A{Zª½g Ed§ BZdoñQ>_oÝQ> nm°{c{g`m| Ho$ g§~§Y _|
risk, future earning and investment policies,
g_mZ hmo V~ CZHo$ eo`g© H$s _mH}$Q> àmBO ^r g_mZ
the market price of their shares must be the
same. According to MM, this is because of ra- hmoZr Mm{hEŸ& MM Ho$ AZwgma, Eogm BZdoñQ>g© Ho$ {ddoH$nyU©
ì`dhma Ho$ H$maU hmoJm Omo H$_ d¡ëW H$s ~Om` Á`mXm
tional behaviour of investors who are assumed
to prefer more wealth to less wealth. d¡ëW ng§X H$aVo h¢Ÿ&
MM Hypothesis: Proof MM hm`nmo[W{gg: ày\$
Step 1: Market price of a share at the ñQ>on 1: nr[a`S> Ho$ àma§^ _| EH$ eo`a H$s _mH}$Q>
beginning of the period is equal to the present àmBO, ^wJVmZ {H$E JE {S>{dS>oÝS²>g H$s àoOoÝQ> d¡ë`y Ed§
value of dividends paid plus market price of nr[a`S> Ho$ A§V _| eo`a H$s _mH}$Q> àmBO XmoZm| H$s Omo‹S> Ho$
the share at the end of the period.
~am~a hmoJrŸ&

1
P 
P =   D  P 1 
1
o
0 1 K
e
Where,
P = Prevailing market price of a share.
0
K = Cost of capital.
e
D = Dividends to be received, at the end of the period.
1
P = Market price of the share at the end of the period.
1
Step 2: If the firm's internal sources of ñQ>on 2: O~ BZdoñQ>_oÝQ> Am°ßÀ`y©{ZQ>rO H$mo \$m`ZoÝg
financing its investment opportunities fall H$aZo Ho$ {cE \$_© Ho$ BÝQ>aZc gmog}g _| Amdí`H$ \$ÊS²>g
short of the funds required and n is the number H$s H$_r hmo Ed§ Bí`y {H$`o JE Z`o eo`g© H$s g§»`m n h¡ V~Ÿ,
of new shares issued then,
(i) Amount required to be raised from the (i) Zo¶o eo¶g© Omar H$aZo go àmßV H$s OmZo dmbr Amdí¶H$
issue of new shares am{e&
np = I – (E – nD )
1 1
(ii) No. of additional shares to be issued: (ii) Omar {H$¶o OmZo dmbo A{V[a³V eo¶g© H$s g§»¶m&