Palo Alto Enterprises has $100,000 in cash. They wish to invest the money in Treasury bills at 6% 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 would be indifferent between the two options. This is because in either case, they would receive the same amount of return on their investment after a year - whether it comes from investing in Treasury bills or receiving a cash dividend and investing it themselves. Therefore, shareholders would simply choose the option that aligns better with their personal financial goals and preferences.

Palo Alto Enterprises Has $100,000 in Cash