Beruflich Dokumente
Kultur Dokumente
Presented by,
Minakshi Pathak
Moona Baral
Padam Shrestha
Pragati Dahal
Prathana Shrestha
Ravi Bhandari
Rithu Malekhu
Rubina Shrestha
Date:2013/04/23
BACKGROUND
Warner Body works is one of the leading producers of custom
coachwork for auto mobiles delivery trucks and other special
purpose vehicles.
Warner body works acquired a number of small firms engaged
in the research of robotics and material science as a move to
broaden its product line.
It has followed liberal dividend policy due to which most of its
stock holders are income-seeking rather than growth oriented.
Some argued that for the directors who owned large holdings of
Warner stock it would be more profitable to retain earnings.
CONTD..
Again it was argued that the company would loose the stock
holders who were interested in high dividends which would
lower their share price.
Looking at these arguments, the vice president of finance has to
come up with the most appropriate solution to tackle the issue.
Answer no.1
1. A CONTINUATION OF THE PRESENT POLICY OF PAYING OUT
60% OF THE EARNINGS.
Advantages:
Individuals, organization, social organization that need stable
income would prefer this policy as it provides a regular
dividend payment.
It minimizes uncertainty to investors as there is a regular
payment of dividend.
A regular dividend policy decrease agency costs by
reducing the free cash flow available to the managers of
the firm.
Thus as per policy, Warner Body Works current
stockholders is in support of high regular dividend.
CONTD
Disadvantage:
This policy would not be appropriate where the
companies have low free cash flow because they are
compelled to pay the regular dividend even if there are
no earnings.
They pay high dividends, so they to bear opportunity
cost of not investing in future projects.
The high payment of dividend leads to low current ratio
and increment of dividend.
If a firm pays out substantial dividends, it may need to
raise external capital at a later stage through the sale of
stock in order to finance the profitable investment
projects.
Advantages:
Lower dividend payouts can be preferred by individuals with
upper tax bracket , given the immediate tax liability, in favor of
higher capital gains with the deferred tax liability.
Low payouts can decrease the amount of capital that needs to be
raised, thereby lowering flotation costs.
As there is less need to raise external equity, controlling interest
of the stockholders will not be diluted.
Contd
Dividend earnings are less risky than capital gains and this will
help to reduce uncertainty.
With the reduction in the dividend payout, there is a risk that
the current income seeking investors would sell their stock.
Aggressive investors would more than take up that slack caused
by possible liquidation of income seeking investors, which
would result in the increase of the stock price if dividends were
cut.
Since high dividends hurt investors, while low dividends-high
retention help the firm's investors, low dividend stocks are more
valuable to the company.
CONTD
Disadvantages:
Lowering present payout below 60% might signal that
the firm is having financial difficulties. Hence the firm
has reduced its dividend payout.
Majority of the Current stockholders \ would sell their
stocks if the dividend payout ratio is reduced. This is
because they are in favor of stable growth rate than
growth potential.
Advantages:
CONTD..
Disadvantages:
There is an uncertainty in how much the investors are
getting as the dividend with this sort of policy; hence it
may not attract those parties who are seeking a stable
dividend.
The investors might think that the company has a weak
financial position, so it is going for a reduction in
dividend payout which may be a cause for negative
signaling to the investors.
CONTD
Reduction of cost of capital on future projects:
o Dividend payment will naturally reduce the present profit but
will definitely reduce the cost of future equity funding.
Disadvantages:
Difficult to alter the dividend policy once announced:
o It is difficult for the company to change its dividend policy
once announced because change in policy would incur high
cost.
Opportunity cost of reinvestment:
o As the company has already declared the dividend to its share
holders, now the company is compelled to pay the dividend .
CONTD.
Answer no.3
Table1: Calculation of ROE
1997
2005
Net Income(EAT)
31.2
104.3
97.3
487
Return on Equity(ROE)
32.07%
21.41%
Here,
g = ROE*(1 - DPR)
Where, g = growth rate
ROE = Return on Equity ,
DPR = Dividend Payout Ratio
For 1997, g = 32.07(1-0.6)
= 12.826%
For 2005, g = 21.41%(1-0.6) = 8.56%
Contd.
In the above calculation for the year 1997 given an ROE of
32.07% and a dividend pay out of 60% the growth rate is
12.8326%
Likewise for the year 2005 when ROE is 21.41% and a
dividend pay out is 60% the growth rate in 8.56%
Answer no.4.
.Payout ratio identifies the percentage of net profit paid to stockholders in the
form of dividends, over a specified time frame. Dividend payout ratio
assesses the companys ability to sustain its dividend payments, and is
therefore useful predictors of continued profitability.
Selected Stock Market Data :
Particulars
Payout
P/E
Playboy
17%
25
Uniroyal
0%
19
Hewlett Packard
11%
17
Datapoint
0%
16
Texas instrument
30%
13
Xerox
40%
10
ATT
67%
Allied Stores
45%
Contd.
In the table companies having low payout ratio like Hewlett Packard
(11%) and Playboy (17%) have high P/E ratios
Companies having high payout ratios like ATT (67%) and Allied Stores
(45%) have low P/E ratios
However companies with payout ratio of(30%) and (40 %) have price
earning ratio of 13 times and 10 times
It is seen that even those firms that do not pay dividend have high P/E
ratios as compared to those who are paying dividends.
A low payout ratio represents a secure future, while a high ratio suggests
that a company has failed to reinvest its profits and may not be able to
sustain dividend payments.
For market with higher RE effect on MPS:
Low payout
High retention for more profitable project
increased MPS
high P/E
This in turn reduces the MPS and finally P/E ratio also declines.
Low payout
low profit
decreased MPS
low P/E
price earning ratio and payout ratio both depicts the profitability
of the firm. So theoretically they should have direct relationship.
However the table shows the relatively inverse relationship.
Answer no. 5
Most organizations prefer to include certain portion of debt
capital in their capital structure.
More debt capital means more amount to be paid as interest as
well as loan.
With increased debt capital the firms are bound to several debt
contracts.
Use of high amount of debt capital will make creditors
reluctant to further provide loans.
Increased use of debt the return for equity shareholder would
be riskier.
In the case of Warner Body Works it has followed liberal
dividend policy.
ANSWERS NO.6
Opinion
ANSWER NO. 8
Four alternative policies:
i)
ROE
g%
40%
60%
21.42
8.57
DPR (20%)
80%
20%
21.42
17.14
DPR (30%)
70%
30%
21.42
14.99
DPR (40%)
60%
40%
21.42
12.85
48%
52%
21.42
11.44
HERE, MURRAY
SHOULD
RECOMMEND
SECOND
20%.
SINCE, THE
EPS 80% WHEN
HIGHEST
DIVIDEND
ANSWER NO. 9
The effect of these changes in optimal payout ratio further
calculation is done as shown in the table below.
Number of
share
Payout
Dividend in EAT
in
outstanding Average
policy
million
million
DPS
{million}
Stock Price
0.2
20.86
104.3
0.42
50
14.62
0.3
31.29
104.3
0.63
50
14.62
0.4
41.72
104.3
0.83
50
14.62
0.6
62.58
104.3
1.25
50
14.62
CONCLUSION
Dividend policy is a very important tool for any
company.
Warner Body Works have avenues open for
expansion opportunities with relatively high returns .
It follows a liberal dividend policy of paying out 60%
of its earnings as cash dividends.
A higher debt in the capital structure would lead to
higher demand for dividend from the part of equity
holders.
Managers should focus on capital budgeting
decisions and ignore investor preferences.
LESSON LEARNT