Palomino Enterprises has $200,000 in cash. They wish to invest the money in Treasury bonds at 5% and use the returns to pay dividends to shareholders after a year. Alternately 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 dividends now or later because they can replicate the investment strategy on their own without any transaction costs or taxes.

Palomino Enterprises Has $200,000 in Cash