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Which actions would enhance the market value of a company

The financial manager's goal is to maximize current market value of the firm. Could the following actions be consistent with that goal? If yes, how. If no, why?

1. The firm adds a cost-of-living adjustment to the pensions of its retired employees.
2. The firm reduces its dividend payment so it can reinvest more earnings in the business.
3. The firm buys a corporate jet for its executives.
4. The firm drills oil in a remote jungle. The chance of finding oil is only 1 to 5.

Solution Preview

1. Adding a cost of living adjustment for the benefit of pension retirees could impact the company, assuming that action would require additional periodic deposits to the pension fund. If so, it would reduce the overall assets of the company which in turn would decrease the total market value of the shares. Sometimes, companies make changes in their pension plans with no impact to the company. The negative result of changes are often paid by the employees and/or retirees. The answer is no: whichever method the company chooses, there will be no benefit to the fair market value of the company.

2. Reducing the dividend ...

Solution Summary

In a 430 word solution, the consequences of the four actions listed in the problem are evaluated in terms of their impact on the market value of the company. There is more than one response for several of the actions, but each is explained.

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