If a firm has numerous investment opportunities and wishes to finance some of them with equity funding, it will likely pay large dividends to shareholders.

Question

Quizplus · Accepted Answer

If a firm wants to finance its investment opportunities with equity funding, it may issue new shares of stock to raise the necessary capital. This will dilute the ownership stake of current shareholders, so the firm is unlikely to pay large dividends to those shareholders. Instead, it may reinvest profits into the company to fund future growth or buy back some of its own stock to offset the dilution.

If a Firm Has Numerous Investment Opportunities and Wishes to Finance