In perfect capital markets, buying and selling securities is a zero-NPV transaction, so retaining cash versus paying it out does not affect firm value.

Question

Quizplus · Accepted Answer

In a perfect capital market, all available information is reflected in securities prices, and there are no transaction costs or taxes. Under these assumptions, buying and selling securities is a zero-NPV transaction, meaning that the present value of the cash inflows (i.e. dividends, interest payments, capital gains) is equal to the present value of the cash outflows (i.e. purchase price). Therefore, retaining cash versus paying it out in the form of dividends or share repurchases does not affect firm value in a perfect capital market.

In Perfect Capital Markets, Buying and Selling Securities Is a Zero-NPV