Question

You are the CFO of a non-dividend paying firm that currently has excess cash reserves. You are preparing for an internal management meeting where dividends are on the agenda. You know that the CEO favors the commencement of a dividend program. You, however, oppose any dividend plan at this time. Write a good argument that you can use in the meeting to support your position.

Answer 1

The argument that can be used to oppose the dividend plan is that excess reserves can be used in financing positive NPV projects.

It should be noted that the excess reserves can increase the firm's value and the shareholders value.

Also, it should be noted that the shareholders are not required to pay any tax on an increase in their share value while the dividend payment results in tax payment.

In conclusion, the excess reserves can be used in generating further income for the company.

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