Betty Borsboom and Walter Good each own 50% of the shares of KM Supplies Ltd. The company has enjoyed steady growth since it began, and all corporate profits have been reinvested in business expansion. The shareholders do not expect this growth to continue, as their market share has reached its peak. In fact, this year, for the first time, the company has generated excess cash flow that is not needed for expansion. 

Borsboom and Good plan to meet to discuss what they should do with this excess. Borsboom is 32 years old and Good is 58, and their personal investment strategies are quite different. Borsboom anticipates that as Good reaches retirement age she will have to buy his 50% interest in the company—unless, of course, they decide to sell the entire company to some other party.

The company has invested the excess funds in treasury bills as a temporary measure while the owners are deciding on a course of action. Good has suggested that the company simply find a more permanent investment; Borsboom has concerns about the future implications of this strategy and may suggest that the company establish a policy of paying a dividend with any excess funds generated.

Required:

1. Identify the problems that may arise if these funds, as well as future funds, are left in the company and used to acquire a permanent investment.

2. What impact would a policy of regular dividend distributions have on the wealth accumulation of Borsboom and Good?

3. Could their problems be solved if each organized a separate holding corporation, which would, in turn, acquire their shares in KM Supplies? Explain.