A company has many positive NPV projects to fund but pays all of its profits as dividends. How could it continue to create shareholder wealth in Miller and Modigliani's perfect world?

Question

Quizplus · Accepted Answer

In Miller and Modigliani's perfect world, the company's dividend policy does not affect its stock price, meaning that investors are indifferent between receiving dividends or holding onto the company's shares. This means that by issuing new shares, the company could raise capital to fund its positive NPV projects without impacting shareholder wealth. As long as the company issues shares at a fair price, investors will be willing to purchase them and the company's shareholders will benefit from the value created by funding the projects. Therefore, option C is the best choice.

A Company Has Many Positive NPV Projects to Fund but Pays