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The Modigliani/Miller Propositions and Dividend Policy

LMU Working Paper No. 2006-22

39 Pages Posted: 24 Jan 2007  

Joerg Wiese

Ludwig Maximilian University of Munich

Date Written: March 5, 2007


The paper shows the impact of payout policy on the Modigliani/Miller Proposition II in a world with differential personal taxes on dividends and retained earnings. Generalizing the results of Modigliani (1982) the relationship between the levered and the unlevered cost of capital is formalized in the case of variable cash flows and dividends. The adjustment formulas derived contain a dividend effect which consists in the tax differential between dividends and capital gains. The Modigliani/Miller adjustment formulas usually discussed in the literature are therefore only applicable under the assumption of full distribution but not in the case of partial withholding of earnings and differential personal taxes.

Notes: Downloadable document is in German.

Keywords: Modigliani/Miller Propositions, dividend policy, valuation, cost of capital, Tax-CAPM, IDW S 1, Discounted Cash Flow, Growth

JEL Classification: G11, H24, H25

Suggested Citation

Wiese, Joerg, The Modigliani/Miller Propositions and Dividend Policy (March 5, 2007). LMU Working Paper No. 2006-22. Available at SSRN: or

Joerg Wiese (Contact Author)

Ludwig Maximilian University of Munich ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539

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