Overview
In mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM equipment manufacturer must decide whether to pay out dividends to the firm¡¦s shareholders or repurchase stock. If Swenson chooses to pay out dividends, she must also decide on the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising and change its corporate name to reflect its new outlook. The case serves a review of the many practical aspects of the dividend and share buyback decisions, including(1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share repurchase decisions.
Critical Issues
Below are listed the various issues that Gainesboro is currently
facing. Issues are listed at random and in no order of importance.
1. Investor Relations:
2. Dividend Policy: Gainesboro needs to choose a adequate policy with regards to its dividend policy that does not jeopardize its ability to generate future earnings or affect its relationship with its large dividend reliant shareholder base.
3. Capital Structure: Debt and equity
Dividend Policy
One of the misconceptions at Gainesboro is the belief that only by
paying dividends will the company be able to make a strong public gesture that the company has ¡§turned¡¨ the corner and is on track to levels of growth and profitability. Typically, growth companies do not pay dividends as earnings are usually reinvested into the company to foster growth and fund various projects and operating assets. While Gainesboro is not a standard growth company, its management and recent activity would seem to suggest that the firm is poised t...
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...ccurately reflects the intrinsic value of the company from the shareholders point of view and their expectations of future earnings.
The continuing value for the residual earnings was determined by taking 2010s projected residual earnings and multiplying it by 1 plus
residual earnings growth from 2009 to 2010, and then dividing this figure by the difference between the cost of equity and the residual growth.
Based on the projected net operating assets and income figures given in
the case (see exhibit 5), the per share value of Gainesboro based on
residual earnings is $ 19.06. This number is much lower than the average share price at which Gainesboro’s shares were trading at for 2004 ($ 29.15), and would suggest that Gainesboro is still overvalued. This model backs up the valuation given by the discounted cash flow if dividends are to be considered and paid.
Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.
In this assignment I will discuss in depth how different dividends policies could affect Mullin plc future prospects, in accordance with the payment or non payment of dividends. Using an analytical approach I will evaluate the dividend policy options available to Mullin plc. I will be primarily focusing on three dividend theories; irrelevant theory, bird in hand theory and Tax preference theory sometimes referred to as clientele theory. Although these theories will be my main focus I may briefly discuss other theories that I feel are relevant to this assignment.
ROE = net profit margin X total asset turnover X total assets to equity ratio = -39.74% for FY 2016.
The present value of the stock needs to be carefully interpreted because the interpretation of a stock worth the sum of all its future dividend payments, discounted back to their present value does not count market sentiments, financial decisions or cyclical
Based on the type of stockholder and the tax bracket they belong to, stockholder’s have varying preferences for receiving dividends and stock buyouts. If LT increases dividend by 1 cent to $0.06 per share, LT’s third quarter dividend payout amount will become $18.7 million (0.06*312.4 # of outstanding shares). This dividend increase by itself without stock buybacks is very small value returned to stockholders, especially when compared to LT’s $1.5 billion cash balance and hence may not be appealing to LT’s institutional investor base. But, institutional investors love to see the dividend increase coupled with the smart stock buyback moves (buying back stocks when stock price is
In order to make a proper investment decision for her mutual fund, Miss Ford made her own discounted-cash-flow forecast. This forecast proved that Nike shares were overvalued by $5.95 per share when maintaining a discount rate of 10%. A sensitivity analysis showed that stock was undervalued at discount rates less than 9.4%. To be certain...
The perceived benefits of dividends are not seen as much than before, other reasons like lower transactions costs for selling tocks, governance techniques to reduce the reliance on dividends as a means of corporate discipline, and clientele effect that some stockholders prefer capital gain over
...ow valuation has been correctly calculated to show the projected future cash inflow will greater than the present value of the company asset.
How to determine the most appropriate dividend policy has become one of the hottest topics in recent years as dividend decisions continue to have a significant impact on both investment and finance decisions (company’s performance overall), affecting financial managers considerations when deciding how much earnings to reinvest and how much to be paid to shareholders (Watson and Head, 2010). There are already many theories either supporting or criticising the impact of dividend decisions on a firm’s value. Litner (1956) indicated that dividends are paid by mature companies who have positive earnings instead of smaller firms and managers always target a long-term dividend payout that can be sustained. This essay will critically evaluate dividend policies relating to appropriate theories by using Vodafone as a primary example; and discuss the possible reasons why the company announced a £1.5bn share buyback program in 2012.
Today financial corporate managers are continually asking, “What will today’s investment look like for the future health of the company? Should financial decisions be put on hold until the markets become stronger? Is it more profitable to act now to better position the company’s market share?” These are all questions that could be clearly answered if the managers had a magical financial crystal ball. In lieu of the crystal ball, managers have a way of calculating the financial risks with some certainty to better predict positive financial investment outcomes through the discounted cash flow valuation (DCF). DCF valuation is a realistic approach, a tool used, to “determine the future and present value of
This paper will discuss how a manager may decide a minimum acceptable rate of return will be for investors. The three models, dividend growth, CAPM, and APT will be analyzed as to each model’s ease of use and effectiveness and applied to General Mills, Inc. Additionally, some companies’ financial information will be compared using the CAPM model, to determine which company has the higher cost of equity and a conclusion will be made as to the effectiveness of these models.
The times interest earned ratio uses a company’s income statement to assess its ability to meet long-...
Accounting profit can serve as an alternative to intrinsic value. But Buffett states that “...we do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.” Accounting reality was conservative, backward looking, and governed by GAAP (measures in terms of net profit), therefore Buffett rejects this alternative. According to the world’s most famous investor, investment decisions should be based on economic reality, not on accounting
The company surpassed the average projections concerning market capitalization value and its stock price. The closing stock price for the year exceeded expectations as
With these characters the company must valuate the shares to let the shareholders to know what the future holds for their dividends which are know as "the future cash flows that will accrue to ordinary shareholders" (Corrria et al. 2004, p. 6-9).