Final answer:
Firms should not give up a positive NPV project simply to initiate or increase dividends. Positive NPV projects indicate value creation for the firm and its shareholders, promising higher future returns through both dividends and capital gains.
Step-by-step explanation:
Within the context of business and financial management, it is generally not advisable for firms to give up a positive NPV (Net Present Value) project, either to pay a dividend for the first time or to increase a current dividend. Doing so may not be in the best interest of the shareholders in the long-term. The primary reason is that a positive NPV indicates that the project is expected to generate returns above the cost of capital, thereby adding value to the firm. This future value creation is critical as it speaks to the fundamental goal of financial management - to maximize shareholder wealth.
Investors expect a rate of return that can come through dividends or capital gains. Dividends are direct payments made to shareholders, representing immediate return, whereas capital gains are increases in stock value over time. Both contribute to the total return for shareholders, but capital gains are typically associated with the appreciation of the investment due to profitable reinvestment decisions made by the firm, including undertaking positive NPV projects.
Ultimately, strategic reinvestment in positive NPV projects typically suggests potential for long-term growth and capacity for future dividend increases, leading to an upward trajectory for both capital gains and dividends over time.