Dividend Policy

Topics: Dividend, Stock market, Stock Pages: 7 (2414 words) Published: December 5, 2011
Question 1

If we take a look at the company’s compounded annual growth rate in EPS we can see that Georgia Atlantic’s growth rate is really low compared to the industry average. Furthermore we can see from the first table that Georgia Atlantic’s P/E ratio is also lower in all the years as compared to the industry and the M/B ratio is also relatively low compared to the industry. Due to the fact that Georgia Atlantic is operating in a relatively mature market, there is a very low possibility for growth, that’s why we consider Georgia Atlantic as a low growth company. For low growth companies it is normal to have a low P/E ratio and a low B/M ratio because most of the company’s value comes from their current operations and assets. Because Georgia Atlantic is a low growth company they should in fact pay out dividend as is the case for low growth firms. But this is not the case for Georgia Atlantic. Question 2

It might be Best for Georgia Atlantic to have an announced dividend policy because the biggest advantage of having an announced dividend policy is that this will reduce the investors (stockholders) uncertainty, and reductions in uncertainty are associated with lower capitalization rates (required returns) and higher stock prices, other things being the same. The disadvantage to an announced dividend policy is that such a policy might decrease corporate flexibility. However, the announced policy would possibly include elements of flexibility, for example, a regular dividend plus extras. On balance, it would appear desirable for directors to announce their policies. Question 3

g=ROE(Retention Rate)
Most firms payout some of the Net Income as dividends and reinvest, or retain the rest. The payout ratio is the percent of net income that the firm pays out as dividend, defined as the total dividend divided by net income. The retention ratio is the complement of the payout ratio: Retention Ratio= (1- Payout Ratio). ROE is the return on equity, defined as the net income available to common stock holders divided by common equity. So the growth rate of a firm depends on the amount of net income that it retains and the rate it earns on the retentions. The formula above produces a constant growth rate. But when using it we are making four assumptions: (1) we expect the payout rate and thus the retention rate to remain constant, (2) we expect the return on equity on a new investment to remain constant, (3) the firm is not expected to issue new common stock, or if it does, we expect this new stock to be sold at a price equal to its book value and (4) future projects are expected to have the same degree of risk as the firm’s existing assets. From the table in question 1, we could see that Georgia Atlantic’s earnings have grown at a slower rate than the industry average earnings. In spite the fact that they have retained all their earnings and never paid any dividends. This results in higher earnings growth from its high retention rate 100%. And because of this Georgia Atlantic’s returns are far below the average of the industry. Question 4

The family’s argument that higher-priced stocks are more attractive because of the lower percentage costs is not valid. Transaction costs are levied over the total amount of the transaction and not on the basis of the number of shares transacted. The value of the individual shares in a transaction are therefore of little importance to the transaction costs. In fact, it can be argued that an optimal price range for stocks in the lumber industry exists between $20 and $40, although there is only little empirical evidence on whether an optimal price range for stocks really exists. This suggests that if a company’s stock sells in this range, the value of the firm is maximized. Georgia Atlantic’s stock price of $2000 might deter small investors from investing in the company. A lower share price will definitely be beneficial to investors because it will give them more options to include the...
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