Use the Dividend Preference Theory to explain the actions of a real firm, and discuss your opinion...

Question

Use the Dividend Preference Theory to explain the actions of a real firm, and discuss your opinion as to the appropriateness and usefulness of this theory in that context.

Robert · Accepted Answer

Dividend preference theory:  
The Modigliani and Miller assumed in the context of the capital market exclude any likely tax 
result. In the Modigliani and Miller theory there was not at all variance in tax management 
among capital gains and dividend.  
While in the real world taxes occur and might require important effect on dividend strategy and 
the worth of a firm. There is frequently the disparity in tax management among capital gains and 
dividend because after tax return attracts the most of the investors and it this impact of taxes 
strength affects their demand for dividends. 
As the taxes are more in the dividend rather than capital gains and also investors does not have 
control on dividend distributions.

Use the Dividend Preference Theory to explain the actions of a real firm, and discuss your opinion as to the appropriateness and usefulness of this theory in that context.

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