Case 19 - Georgia Case Atlantic
Case 19 – Georgia Atlantic Company (Dividend Policy)
Critique the 6 alternative dividend policies proposed by Abe Markowitz. Discuss the implications of each for Georgia Atlantic Company. Make your recommendation on which is the best for the shareholders and state the reasons why.
Solution
No Cash Dividends, No Stock Dividend or Split
This strategy will be the worst possible choice for Georgia Atlantic. This is due to the fact that the company’s recent Market-to-Book value is well below 1. This is an indicator that the company has not invested in any profitable projects anymore. The share price of the company will also stay rather constant. This would mean that the price would rarely exceed the optimal range of $20 to $40. It must be noted that a lower share price will increase the P/E ratio of Georgia Atlantic, which in turn will project a healthier image of the company in the market eyes. Aside from that, the retained earnings will generate a higher shareholder value if it had been paid out to the shareholder.
Immediate Cash Dividend, but no Stock Dividend or Split
Since Georgia Atlantic is considered as a value company and most notably few growth opportunities, an immediate cash dividend will allow the company to increase its shareholder value much more by paying out dividends as compared to retaining its earnings. The problem that lies with this strategy is simply because the company’s stock price is considered quite high. In the year 2000, the price per share of the company is $1,902 and this will deter potential investors from investing in the company. The most optimum pricing range will be around $20 - $40. However, this will inadvertently put more pressure on the company, as their liquid assets level is very low.
Immediate Cash Dividend plus a Large Stock Split
The large stock split will indeed be beneficial as it will helps bring down Georgia Atlantic share price significantly. As such, it will be more appealing for investors to
Critique the 6 alternative dividend policies proposed by Abe Markowitz. Discuss the implications of each for Georgia Atlantic Company. Make your recommendation on which is the best for the shareholders and state the reasons why.
Solution
No Cash Dividends, No Stock Dividend or Split
This strategy will be the worst possible choice for Georgia Atlantic. This is due to the fact that the company’s recent Market-to-Book value is well below 1. This is an indicator that the company has not invested in any profitable projects anymore. The share price of the company will also stay rather constant. This would mean that the price would rarely exceed the optimal range of $20 to $40. It must be noted that a lower share price will increase the P/E ratio of Georgia Atlantic, which in turn will project a healthier image of the company in the market eyes. Aside from that, the retained earnings will generate a higher shareholder value if it had been paid out to the shareholder.
Immediate Cash Dividend, but no Stock Dividend or Split
Since Georgia Atlantic is considered as a value company and most notably few growth opportunities, an immediate cash dividend will allow the company to increase its shareholder value much more by paying out dividends as compared to retaining its earnings. The problem that lies with this strategy is simply because the company’s stock price is considered quite high. In the year 2000, the price per share of the company is $1,902 and this will deter potential investors from investing in the company. The most optimum pricing range will be around $20 - $40. However, this will inadvertently put more pressure on the company, as their liquid assets level is very low.
Immediate Cash Dividend plus a Large Stock Split
The large stock split will indeed be beneficial as it will helps bring down Georgia Atlantic share price significantly. As such, it will be more appealing for investors to