Electronic Case (Corporate Finance) Essay

Electronic Case (Corporate Finance) Essay

1. Tom believes the company should utilize the excess hard currency to pay a particular erstwhile dividend. How will this proposal affect the stock monetary value? How will it impact the value of the company? Electronic Timing. Inc. ( ETI ) needs to be careful on how it dispenses the excess hard currency as a dividend. Publishing the excess hard currency as a dividend would intend that the stockholders jointly will likely drop by the same sum because of the transportation of wealth from the company to the stockholders separately. Hence. the economic value of the company will besides diminish.

2. Jessica believes that the company should utilize the excess hard currency to pay debt and ascent and spread out it bing fabricating capableness. How would Jessica’s proposals affect the company? Jessica’s proposal will back up an expansionary policy for the company which can ensue to a higher growing rate for ETI. As to the company’s dividend policy. non publishing the excess hard currency as a dividend signals to the market that there are still better and more efficient utilizations of the hard currency than utilizing it for dividends.

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3. Nolan is in favour of a portion redemption. He argues will increase the company’s P/E ratio. return on assets. and return on equity. Be his statements rectify? How will a portion redemption impact the value of the company? A portion redemption if done right should be tantamount to the issue of a hard currency dividend with the same sum as respects to effects on shareholders’ wealth. The manner the portion repurchases should be done in a manner that it does non decrease or make stockholder wealth. Hence. Nolan’s statement that the company’s return and assets and return on equity will increase is non right. However. the P/E ratio might travel upwards for a clip until the market corrects it.

4. Another option discussed by Tom. Jessica and Nolan would be to get down a regular dividend payment to stockholders. How would you measure this proposal? A program to publish a regular dividend to stockholders is a start in set uping a dividend payout policy. A dividend policy signals to the market that the company is doing a committedness to its stockholders and hence the company schemes will hold to be aligned with that committedness.

Therefore I would measure the proposal as respects the company’s ability to lodge to it. For illustration. it adopts a stable dividend policy – will it be able to hold hard currency to honour such policy twelvemonth on. twelvemonth off? Another factor would be does a regular dividend affair to ETI’s stockholders? Or do they prefer a different method of reassigning wealth to them aside from a hard currency dividend?

5. One manner to value a portion of stock is the dividend growing. or turning sempiternity. theoretical account. See the followers: The dividend payout ratio is 1 subtraction b. where B is the “retention” or “plowback” ratio. So. the dividend following twelvemonth will be the net incomes next twelvemonth. E1. times 1 minus the keeping ratio. The most normally used equation to cipher the sustainable growing rate is the return on equity times the keeping ratio. Substituting these relationships into the dividend growing theoretical account. we get the undermentioned equation to cipher the monetary value of a portion of stock today: What are the deductions of this consequence in footings of whether the company should pay a dividend or upgrade and spread out its fabrication capableness?

Explain. The substituted dividend growing theoretical account is Dt=Dt-1 ( 1+rb ) . This equation implies that the future dividends of the company are straight related to the sum of net incomes it retains and the rate of return if makes from its investings. However. in order to achieve the company’s targeted rate of return it besides needs to retain more of its net incomes in the company for upgrading or spread outing its fabrication works instead than utilizing it for hard currency dividends.

In the expansionary stage. the company has to do trade offs – lower dividends for higher growing.

6. Does the inquiry of whether the company should pay a dividend depend on whether the company is organized as a corporation or an LLC? No. an LLC can administer net incomes to its proprietors ; nevertheless that distribution is non called a dividend. but instead distribution of hard currency or belongings to the spouses. It is still a dividend in a different name.



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