1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock. Which of these three elements is Eastboro management willing to vary, and which elements remain fixed as a matter of policy?
Management is willing to vary their investment (investing less) as well as issue more stock. This is not against their policy. But the management would not be willing to borrow more as their borrowing policy is limited to 40% debt to equity ratio.
2. What happens to Eastboro's financing need and unused debt capacity if
,
a. No dividends are paid?
If no dividend are paid, the company does not need financing required for the dividends. Hence the company’s financing needs
…show more content…
Based on the financing needs, as above dividends would be additional stretch on company finances
3. How might Eastboro's various providers of capital, such as stockholders and creditors, react if Eastboro declares a dividend in 2001?
If Eastboro declares a dividend in 2001, it will have to take debt to raise the money required for the dividend. The creditors will not react positively with this decision because the money is not being used in the increasing the value of the company. On the other hand, the stockholders will react positively as the dividend payout reflects confidence of managers in the future earnings of the company and also gives the stock holders flexibility to invest their dividend earnings in other companies .
4. What are the arguments for and against the zero payout, 40 percent payout, and residual payout policies? What should Jennifer Campbell recommend to the board of directors with regard to a long-run dividend payout policy for Eastboro Machine Tools Corporation?
Stock prices increase on average when firms announce
- Increases in dividends (around 2%)
- Dividend initiations (around 3%)
Stock prices decrease on average when firms announce
- Decreases in dividends (around -2.5%)
- Dividend omissions (around -9.5%)
What the market learns from dividend changes may depend on the firm’s particular circumstances:
1. The firm wishes to attract attention: 2. Div increase signals mgmt confidence 3. The
Issuing additional debt to finance the company expansion would worsen the company’s debt ratio as it is already more than average. The company envisions to be profitable by raising capital from existing stockholders by issuing common stock through rights offering.
Key Issue 2: Is $1b appropriate to enhance UST’s firm value and ultimately shareholder value?
The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.
3. Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why of why not?
Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5.
Why did Hampton repurchase a substantial fraction of its outstanding common stock? What is the impact of this repurchase on Hampton's financial performance? Critically assess Hampton's dividend policy. Do you agree with Mr. Cowin's proposal to pay a substantial dividend in December?
Q3. Do you agree with Mr. Clarkson’s estimation of the company loan requirements? How much will he need to finance the expected expansion in sales to $ 5.5 Mil. In 1996 and to take all trade discounts?
* Taking on debt gives the company the ability to use cash for projects and short term investments.
After carefully reviewing the income statement, balances sheet and cash flow it seems that the company has a negative cash flow for 1998, so even before thinking about obtaining internal and external resources for long term investment, the company must assure resources for their own working capital.
2. Do you think Bed Bath & Beyond has too much cash? Should Bed Bath & Beyond lever up? Consider both the 40% and 80% debt-to-total capital proposals.
3. What restructuring option – Icahn’s spin-off proposal or the company’s targeted stock proposal – will create the most value for shareholders? For creditors? For the firm’s other stakeholders?
4. What offer would you make in an effort to gain the support of the Robertson family and the great majority of the stockholders, while improving the long-term trend of Monmouth’s earnings per share over the next five years?
a. What are Q’s EPS and dividends next year? How will EPS and dividends grow in years 2, 3, 4, and 5 and subsequent years?
Dividends are subjected to higher tax rate compare to capital gain increased due to share buy-back. This discourages shareholders from desire to receive high dividends in place of higher capital gain as share values increase. A comparison is made below between the proposed capital structure and dividend policy.
I, student of Post Graduate Diploma in Management from hereby declare that I have completed dissertation on “IMPACT OF DIVIDEND POLICY ON CAPITAL STRUCTURE ” a part of the course requirement.