Company Velco must decide the strategy to be followed in the future. The current policy today yielded a profit after tax of €5 000 000. It is expected that if this policy is continued, the profit after tax will grow by 2.5% annually. Under these circumstances, the shareholders demand a return of 9%. Velco can also choose to expand its product range. As a result, she expects an annual increase in profit after tax of 8%. Since with this policy the risk profile of the company increases, a return of 15% is required. Finally, it is also possible to conquer new markets with its existing products, for instance abroad. This policy would lead to a profit increase of 6%. The required return, in this case, is 12.5%. The company has a policy of full profit distribution. I. Which strategy maximizes shareholder value? II. Which strategy will the company prefer?
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