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ACCA Strategic Professional · Advanced Financial Management · Strategic business and financial planning for multinational organisations

A multinational's board proposes to raise its dividend payout sharply to signal confidence, while a major project with a positive NPV is left unfunded because external equity is judged too costly. Which financial strategy principle is most directly breached?

The board breaches the objective of maximising shareholder wealth. A positive-NPV project is forgone to fund a larger dividend, so value that could have been created is lost. Dividends should be the residual after value-adding investment, not a signal bought at the expense of good projects.

  1. AThe objective of maximising shareholder wealth, because value-creating investment is rejected in favour of a distributionCorrect
  2. BThe requirement that dividends must always equal free cash flow to equity
  3. CThe rule that a multinational may never pay dividends from retained earnings
  4. DThe principle that debt must be used before any equity is considered

Explanation

Under the wealth-maximisation objective, positive-NPV projects should be undertaken, with dividends as the residual after funding them. Forgoing such a project to pay a higher dividend destroys value. The other options state rules that do not exist in the AFM syllabus.

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