Question
An effective financial system enables savers/investors to invest their capital in companies to generate returns. The returns demanded are determined based on the risk of
An effective financial system enables savers/investors to invest their capital in companies to generate returns. The returns demanded are determined based on the risk of the projects that different companies undertake.\ To create value, companies have to invest in projects that provide positive NPVs or that provide returns higher that the hurdle rate or cost of capital. If a company runs out of quality projects, then it needs to return the cash it has generated from operations to investors in the form of dividends or share repurchase programs.\ In their New York Times opinion article, senators Chuck Schumer and Bernie Sanders described stock buybacks and dividends as corporate self-indulgence and an enormous problem for workers and for the long-term strength of the economy. In the Journal of Applied Corporate Finance, Greg Milano and Michael Chew disagree with the senators statements and suggest that dividends and buyback allow investors to have capital to invest in up and coming firms with high growth potential, which can positively impact the economy and create jobs.\ Describe the rationale provided for both viewpoints and explain which viewpoint you agree with the most and why.
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