Palo Alto Enterprises has $300,000 in cash. They wish to invest the money in Treasury bills at 8% and use the returns to pay dividends to shareholders after a year. Alternatively they can pay a dividend and allow shareholders to make the investment. In perfect capital markets, which option will shareholders prefer?

Question

Quizplus · Accepted Answer

In perfect capital markets, shareholders are indifferent between receiving a dividend now and investing it on their own, or receiving a dividend in the future funded by the return on an investment made by the company. Therefore, the decision to invest in Treasury bills or pay out a dividend will not affect shareholder preferences. As a result, the best choice for the company may depend on other factors such as tax implications or long-term financial goals.

Palo Alto Enterprises Has $300,000 in Cash