Reference no: EM13885733
Integrated Case: Southeastern Steel Company
Dividend Policy
Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new continuous casting process. SSC's founders, Donald Brown and Margo Valencia, had been employed in the research department of a major integrated-steel company; but when that company decided against using the new process (which Brown and Valencia had developed), they decided to strike out on their own. One advantage of the new process was that it required relatively little capital compared to the typical steel company, so Brown and Valencia have been able to avoid issuing new stock and thus own all of the shares. However, SSC has now reached the stage in which outside equity capital is necessary if the firm is to achieve its growth targets yet still maintain its target capital structure of 60% equity and 40% debt. Therefore, Brown and Valencia have decided to take the company public. Until now, Brown and Valencia have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm; so the firm's dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy.
Assume that you were recently hired by Arthur Adamson & Company (AA), a national consulting firm, which has been asked to help SSC prepare for its public offering. Martha Millon, the senior AA consultant in your group, has asked you to make a presentation to Brown and Valencia in which you review the theory of dividend policy and discuss the following questions.
A. (1) What is meant by the term dividend policy?
A. (2) Explain briefly the dividend irrelevance theory that was put forward by Modigliani and Miller. What were the key assumptions underlying their theory?
A. (3) Why do some investors prefer high-dividend-paying stocks, while other investors prefer stocks that pay low or nonexistent dividends?
B. Discuss (1) the information content, or signaling, hypothesis; (2) the clientele effect; (3) catering theory; and (4) their effects on dividend policy.
C. (1) Assume that SSC has an $800,000 capital budget planned for the coming year. You have determined that its present capital structure (60% equity and 40% debt) is optimal, and its net income is forecasted at $600,000. Use the residual dividend model to determine SSC's total dollar dividend and payout ratio. In the process, explain how the residual dividend model works. Then explain what would happen if expected net income was $400,000 or $800,000.C. (2) In general terms, how would a change in investment opportunities affect the payout ratio under the residual dividend model?
C. (2) In general terms, how would a change in investment opportunities affect the payout ratio under the residual dividend model?
C. (3) What are the advantages and disadvantages of the residual policy? (Hint: Don't neglect signaling and clientele effects.)
D. Describe the series of steps that most firms take in setting dividend policy in practice.
E. What is a dividend reinvestment plan (DRIP), and how does it work?
F. What are stock dividends and stock splits? What are the advantages and disadvantages of stock dividends and stock splits?
F. What are stock dividends and stock splits? What are the advantages and disadvantages of stock dividends and stock splits?
|
What is the difference between accounting and finance
: What is the difference between accounting and finance? What are the three steps in the finance cycle? List them in the proper sequence from beginning to end
|
|
What effect will reclassifying a long term investment
: What effect will reclassifying a long term investment into cash within one year have on the current ratio?
|
|
Overview of business intelligence technology
: Discuss connections, similarities, shared issues, discrepancies, possible combinations of problems and techniques from the three papers, etc. Whatever you consider relevant, but with reasons and referring to the papers if necessary.
|
|
Difference between rmi and rpc as communication models
: Describe how you would deploy a security measure at each level of the OSI model. Describe the difference between RMI and RPC as communication models
|
|
What is meant by the term dividend policy
: What is meant by the term dividend policy? Explain briefly the dividend irrelevance theory that was put forward by Modigliani and Miller. What were the key assumptions underlying their theory?
|
|
What final temperature will be reached by the water
: Hydrogen gives off 120. J/g of energy when burned in oxygen, and methane gives off 50. J/g under the same circumstances. If a mixture of 5.0 g of hydrogen and 10. g of methane is burned, and the heat released is transferred to 50.0 g of water at 2..
|
|
How could it negatively impact the security of the users
: As for the other three areas that will be covered in the paper. What are those trade agreements, why was it voted for, and how could it negatively impact the security of the users in the participated countries in the agreement
|
|
Mass of the water in the container
: What is the mass of the water in the container, assuming that all the heat lost by the copper is gained by the water?
|
|
Find point on the x axis where the electric field is zero
: Consider the vertical line passing through the charge -q, that is, the line given by x = a. Locate, at least approximately, a point on this line where the electric field is parallel to the x axis.
|