This is a short answer question, please make the point clearly and separte your

Question

This is a short answer question, please make the point clearly and separte your points for each arguments.

"A political advisory committee recently recommended wage and price controls to prevent the spiraling inflation that was experienced in the 1970s. Members of the investment community and several labor unions have sent the committee reports that discuss whether or not dividends should be under the controls.
The reports from the investment community demonstrated that the value of a share of stock is equal to the discounted value of its expected dividend stream. Thus, they argued that any legislation that caps dividends will also hold down share prices.
The union reports conceded that dividends are important to shareholders, but only because the dividend is the shareholder's wage. In order to be fair, the unions argued, if the government controls labor's wage, it should also control dividends.

Q: Discuss these arguments and explain the fallacy in them."

Explanation / Answer

As per the irrelevance theory proposed by Miller & Modigliani in 1969 the following can be explained.

Return: The return to the shareholders comprises capital gain plus dividend yield.

Stock price: The wealth of shareholders is not affected by the dividend policy of the firm. On the ex-dividend date the price of stock fall in proportion to the amount of dividend distributed among the shareholders. The distribution of dividend is the part of firm’s dividend policy and the value of firm is related to the earnings of the firm. Thus, the price of stock is dependent on the firm’s earnings.

From the above explanation, it can be said that the dividend is not the only return to the shareholders and price of stock cannot be controlled by controlling the dividend.

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