The Separation Theorem States Finance Essay

First, the company should take on investment projects that offer higher rate of return and regardless of the preferences of the firms owners. Shareholders wealth will be maximized by investing in as many such projects as are available.

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Second, investments preferences of individual shareholders are irrelevant in making corporate investment decisions. If Costco Wholesale Company makes a right decision to invest on a certain projects, this will take the value of company to the maximum level. As a result, the performance of the investments has no influence to how they are financed, whether by stock, debt, or cash. This is because individual shareholders can match their personal tastes by borrowing or lending to adjust the dividends from the business.

Third, the financing method does not make any changes on the shareholders’ wealth. In brief, the behavior of Costco Wholesale Company is not consider during the process of selecting investments, and the goal of maximizing the company’s value is the main part for making investment decisions.

Costco Wholesale Company should make investments in the new warehousing facilities rather than paid dividend to the shareholders. Warehouse building office space is very useful; they can be used in any manufacturing unit or storage unit as it offers higher rate of return Costco Wholesale Company needs to create custom office space. A vast space brings lot of benefits in warehouse building as Costco Wholesale Company can install modular office walls as the company needs more spaces as it needed. Warehouse buildings are considered as effective investment. For example, Costco Wholesale Company can make the agreements at market rents. Such storage device or from other warehouse leasing or rental, the recurrent expenditure, monthly or yearly in the long run it is expensive. Therefore, the more storage needs the company have, the more worth purchase-sale warehouse building. The high demand for new storage customer’s help revitalizes the neighborhood. Shop in the community where the establishment of a warehousing and distribution services, there is an important new employer who is sufficient to revitalize communities or entire towns. Employees become experts on warehousing during the process of serving the needs of multiple corporate clients. With the company warehouse distribution suppliers request a quote, the experts believe that the selection process may affect the size and location of the logistics park.

Investments preferences of individual shareholders are irrelevant in making corporate investment decisions. The most important point in the process of making investment in a new warehouse building is earning as much as many of the profits. The consideration of a dividend policy is irrelevant because the investors have the ability to make adjustments own portfolio to earn income. For example, investors looking for interest payment that will not change are more likely to invest in bonds rather than a dividend-paying stock which value can easily change. Dividend stock is less risky than stocks do not pay dividends. However, they have a certain risk and the return of some investors may not be able to maintain a sufficient commitment. Those investors who own bonds are not caring about a particular company’s dividend policy because their interest payments won’t change. Costco Wholesale Company needs to explain more details and make sure that the investors are understand what the running of the market price and hire some financial analysts to estimate the forecast of the moving in a stock’s price about one month. A high dividend is important for investors because dividends provide a clear understanding of the company’s financial well-being. It helps to attract more investors to make investment in the company.

Financing method does not make any changes on the shareholders’ wealth. The goal of maximizing the company’s value is the main part for making investment decisions, but not the behavior of Costco Wholesale Company during the process of selecting investments. Purchasing a warehouse building is a profitable transaction. Costco Wholesale Company can expand the business by selecting a scalable warehouse building investment. The company can store a lot of stocks that the customer’s order in the warehouse. A big and enough storage space allow the company easy to check and arrange stocks. It helps to reduce costs and increase the profits. Warehouse building is easy and requires not expensive cost to build. Now days, most construction of warehouse buildings are using steel as it much cheaper. Costco Wholesale Company can pay investors in the form of cash dividends. The corporation can reinvest by taking all the profits in growth opportunities and acquisitions. The company will grow and increases the stock price if the company knows how to invest its capital by efficiently and wisely. When the investor sells this growing company, he or she will receive the benefit by getting a higher price for the stock that she purchases. However, when Costco Wholesale paid the dividends, it affects the company growth due to lack of capital to invest. The high dividend payout ratio is very important, because dividends provide investors with the certainty of the company’s financial well-being and it acts as an attraction for investors looking to secure current income. But, the disadvantage is that investors must pay 15% of the dividend tax. If the payment is retained, then the share price could grow tax-free until it is sold, only 5% of the capital gains tax will apply.

In conclusion, Costco Wholesale Company’s objective needs to maximize the profits in order to survive in such a competitive business field.

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The Separation Theorem States Finance Essay. (2017, Jun 26). Retrieved November 29, 2022 , from
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