Willows Corporation is experiencing high demand for its products and high growth rates.The company just reported earnings per share of $5 for the most recent year and has many positive NPV projects to fund.One vice president wants to pay a dividend of $5 per share,arguing that this will maximize shareholder value.You argue that a much smaller dividend will maximize value.Your argument may be based on
A) the bird-in-the-hand theory.
B) the residual dividend theory.
C) the information effect.
D) the very high agency costs of the corporation.

Question

Quizplus · Accepted Answer

The residual dividend theory suggests that a company should first fund all positive NPV projects and then pay out any excess cash as dividends. Therefore, it is likely that a smaller dividend would be more appropriate for Willows Corporation in order to maximize shareholder value by investing in these positive NPV projects. Option A, the bird-in-the-hand theory, argues that investors prefer current dividends over potential future capital gains, but this theory does not necessarily apply to a high growth company like Willows Corporation. Option C, the information effect, suggests that dividend changes communicate information about a company's financial health, but there is no indication that this is a factor in the scenario. Option D, the very high agency costs of the corporation, is not directly applicable to the dividend decision.

Willows Corporation Is Experiencing High Demand for Its Products and High