Palo Alto Enterprises has $200,000 in cash.They wish to invest the money in Treasury bills 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 would be indifferent between receiving an immediate cash dividend or a dividend after one year from the returns on the Treasury bills, as they could easily reinvest the dividend themselves to achieve the same return. Similarly, offering shareholders the opportunity to make the investment themselves would also result in indifference, as they could choose to invest in Treasury bills or another investment with a similar return. Therefore, the best choice for Palo Alto Enterprises would be to make a decision based on their own preferences and financial goals, without worrying about shareholder preferences.

Palo Alto Enterprises Has $200,000 in Cash