Comment on the following statement from the perspective of Miller and Modigliani: 'It is considered as an essential for the firm to declare the dividend on equity shares to attract the fresh capital in future'.

According to Modigliani and Miller, under a perfect market situation, the dividend policy of the firm is irrelevant, as it does not affect the value of the firm. Every investor in a security or a project looks for a return on his investment. The return should be a regular flow of income. Hence, it is correct that dividend declaration is important for attracting investment. However, the Modigliani and Miller model says that dividend is irrelevant and an investor is equally happy with capital appreciation which can be encashed through home-made dividends by selling part of the investment. What is really important is the return to the investor and not just dividend. If an investor can be reasonably certain that he will receive a return whether as dividend or as capital appreciation then he can be expected to invest and capital can be attracted. Therefore, Modiglani and Miller do not consider dividend as essential, rather they argue that if the firm does not pay any dividend, a shareholder can create a 'home-made dividend' by selling part of his shares at the market price in the market and avail the cash balance. Therefore a shareholder is indifferent whether company pays dividend or not.