How will Gainesboro’s various providers of capital, such as its stockholders and bankers, react to a declaration of no dividend? What about the announcement of a 40% payout? How would they react to a residual payout? Structure for presentation * Introduction * Gainesboro’s situation * Gainesboro’s strategy * Gainesboro’s Dividend background * Gainesboro’s Dividend policy * No dividend * Include advantages and disadvantages of having a zero-dividend policy * Affect on stockholders, bankers etc? * 40% payout * Include advantages and disadvantages of having a 40% payout of dividends * Affect? * Residual payout * Include advantage and disadvantages of having a …show more content…
Advantage : * Beneficial for the firm’s share price ( but only if the earning increase) * Debt covenant reduce agency costs = good sign * Share price increase so external financing by share issues more effective.
Disadvantage : * 40% payout ratio will increase the cost of debt and put at risk it s investment opportunities * According to Asquith and Mullins (1986,36) dividend signalling is more effective for lower risk firms, which Gainesboro is not. * Raise the capital to pay dividend by borrowing more will lead to an increase of debt to equity ratio and consequently financial risk.
Reaction of various providers of capital : * Gainesboro’s shareholding is constituted at 26% of long term retirement investors. * 6% is growth term trading oriented * The employees and their families, holding 17% already have an income and thus do not need dividends; they are more interested in long term capital gains and thus will not react positively.
But Even though they already have an income shouldn’t they still be entitled to a dividend payout ? * if Gainesboro declares a dividend in 2005, debt holders will not be pleased.