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A company is having some profitable investment projects with positive NPV to invest in. In your opinion what is better option to increase firm's market value : a. To pay dividends to shareholders as per normal company practice. b. To retain profits and invest them in profitable projects to create more value for the shareholders. c. A combination of the two to create value.
While most firms follow the net present value rule, there are some situations where the theory is abandoned. If the company is pressured by large debt payments, some positive NPV projects will be rejected. In this case, the initial capital will go towards servicing the debt instead of investing in new projects.
If a firm has poor corporate governance, managers may ignore the net present value rule. In order to appear active, management may take on negative NPV projects to give shareholders the illusion of ongoing corporate investment.
It depent on oppertunities available to the company that if share holders are interesting in divident more as compare to oppertunity available then divident should be declare and vise versa
If the return from new investment is more than the company's present cost of capital then retaining profit will increase firm's market value. Otherwise it is better to pay dividend.
If return from new investment is greater than cost of capital then retaining profit and investing in profitable project will increase the market value of firm but management should also consider the interest of share holders
c. A combination of the two to create value
