Cost of capital

Does paying dividends affect a company's value?

Imagine you're saving money for a big trip. You have two options: put your savings into a bank account that pays interest, or spend it right away. Which option helps you save more for your trip?

If you put your savings in a bank, you earn interest over time, growing your money. In finance, this is like investing in a company's stock. The Modigliani-Miller theorem suggests that dividends, like spending your savings right away, don't change the total value of your savings (the company's market value).

Example

You save 100 in a bank account with 5% interest. After a year, you have 105. If you spend the $100 right away, you have no savings to grow.

Remember this

Dividends don't affect a company's total market value.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

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Educational content, not financial advice.

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