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Investment Community

A political advisory committee recommended wage and price controls to prevent the spiraling inflation. 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, thereby increasing companies’ costs of capital.

The union reports conceded that dividend policy is important to firms that are trying to control costs. They also felt that dividends are important to stockholders, 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.

Instructions:

Discuss these arguments and explain the fallacy in them.