According to fundamental financial theory, dividends should be paid out when excess cash exists after the firm has invested in all available projects. However, this does not always happen, and furthermore than that, the concept of dividends is routinely used as either a way of showing financial stability to or getting in the good graces of stockholders. Advantages • Can be used as a tool in solving agency problems that exist between management and shareholders • Often signals a strength in profitability • Gives the firm a choice between buying more stock, paying dividends, or investing in either a short-term or long-term project • More dividends usually increases a firm’s stock price due to increased demand Disadvantages • Depending on the firm, paying out dividends can inhibit growth if it significantly hampers the funding of investment projects • The fact that paying out dividends does not have an direct impact on the firm’s value can be seen as a disadvantage • The tax rate for corporations is higher on dividends paid than capital gains earned • As mentioned in the advantages, because the use of dividends can positively stock price, when a firm stops paying them out it can have a negative effect on stock price The most immediate concerns facing the FPL Group in May 1994 result from recent industry deregulation which is causing increased competition. Because of these recent changes enabling the implementation of wholesale wheeling, FPL Group needs to be confronting the issue of ensuring that they are able to handle competition from both in-state and out-of-state providers. Other immediate decisions that need attention from management come in the form of dividend policy. In order to reconcile the effect of increased competiti... ... middle of paper ... ...ing the goal of decreasing dividend expenses. FPL’s stock is a hold. One of the primary reasons for this is because of the fact that the firm will most likely keep their current dividend payout of $2.48 the same. Although the firm’s management has indicated that the payout ratio is a little bit disproportionate given the uncertainties that face the industry, FPL’s earnings growth rate is expected to stay relatively high due to declining expenditures in addition to increasing sales. Important to this recommendation is the fact that there is no evidence which would point to FPL drastically decreasing dividend payouts cut in addition to the fact that the firm doesn’t appear to be in any immediate financial difficulty. These reasons, coupled with the fact that FPL will continue to prepare for industry-environment changes are all arguments for the hold recommendation.
Another observation is that GM looks to use more debt financing that equity financing for funding their activities. The debt to equity ratio has steadily decreased over the past five years and is higher that the industry average. Also, the current and quick ratios are much lower than the industry averages. This again can pose so...
However, financial situation of the firm plays a very important role in the decision of the bondholder and this company has been one of the most profitable companies America in terms of ROE, ROA ad gross profit margin. Apart from decrease in earnings and cash flow in 1997, UST had continuous increases in sales (10-year compound annual growth rate of 9%), earnings (11%) and cash flow (12%). They are generating their cash flows out of the operations. Thanks to their premium pricing, they are achieving more than average gross profit margin. So, over the years UST's revenues are stable and positive, and generally its statements are positive. The company does not have any problems with its cash flow.
DuPont is a very big company with a low debt policy designed to maximize financial flexibility and insulate operations from financial constraints. It is one of the few AAA rated manufacturing companies due its investments are primarily financed from internal sources. However, because prices fell in the 1960’s thus DuPont’s net income fell also. The adverse economic conditions in 1970’s escalated inflation: increase in oil prices increased required inventory investments of the company. 1975 recession negatively affected DuPont’s net income by 33% and returns on capital and earnings per share fell. The company cut dividends in 1974 and working capital investment removed. Proportion of debt increased from 7% in 1972 to 27% in 1975 and interest coverage falls from 38 to 4.6. The company perceived increase in debt temporary but moved quickly to reduce its debt ratio by decreasing capital expenditures. Debt proportion dropped to 20%, interest coverage increased to 11.5 by 1979.
this means cash flow is improves as the money is not tied up in stock
Negative Net Income: Perhaps the most obvious disadvantage is that traditional “value” investors are turned off by the company’s consistent negative net income, leaving nothing to return to shareholders in terms of dividends or share buybacks.
There are many valuation methods that could be used to evaluate this company. Finding a method that valuates the stand-alone value is difficult. The stand-alone value should be dependent upon the firm’s own assets and projected future income. We decided to evaluate this company based upon two methods: The Discounted Cash Flow Method and the Comparable Companies Method.
1. Context: In early September’08 Giant Consumer Products, Inc. (GCP) realized that Frozen food division, which had been growing at 2.8% (compounded annual growth) rate since 2003 to 2007 and accounted for almost 33% of GCP’s overall business volume, is not doing well now. The sales as well revenue volume is around 3.9% behind the target. Most specifically marketing margin (key parameter for GCP business) was also under plan by 4.1%. GCP had been doing well in wall-street but performance of past couple of quarters has increased the worries of GCP i.e. whether GCP will able to maintain its profitable growth.
Dividends is used often with the stock market, dividends are profit you receive when the company makes a profit. If the company does not make a profit, you will not receive a dividend reimbursement. Payments can be reinvested, which helps build wealth because you are increasing your portfolio. You can also so use this cash for whatever you like.
Firstly, based on the profitability, P&G has earned higher profit from each dollar of revenue which is 13.4% compared to C-P 12.9% for the recent year 2013. In addition, P&G also has higher EPS of US$4.04 compare to C-P US$2.41. In contrast, C-P register a Gross Profit of 58.7% and Return on Equity of 91.0% as opposed to P&G’s 49.6% and 17.0% respectively. C-P seems to rely heavily on debt and this has helped to improve the Return of Equity. P&G also has its downside in asset turnover ratio (0.62) and fixed turnover
...and investors to invest. No shareholder or investor wants to see that the company they are putting their money into is not performing as they had hoped. Furthermore, by having more investors AdCom will be able to expand its product lines and grow their company.
Businesses face lots of challenges today during their development and growth, and they should decide how much financial investment are they want to put into the development of certain projects.
If they company thinks that the earning will fall, stocks will decrease; deterring from investors losing money these types of
Managers are encouraged to act more in the interest of shareholders and the amount of leverage in the capital structure affects firm profitability (Ebaid, 2009).
However there are consequences which privately equity funds additionally tend to aim to maximise their returns by an increase on efficiencies and cutting prices during the short run as where they control a company. In resulting of cost cutting which would occur towards unfavourab...
The ratios returns on investment (ROI) and return on equity (ROE) are two of the most popular measure of profitability of a company and, along with the P/E ratio, have the most significant value of any of the ratios. The DuPont Model expands on the ROI calculation by inserting sales and it's relationship to the companies' generation of profits and utilization of assets into the calculation. Additional profitability ratios include the price earnings ratio (P/E), the dividend payout and the dividend yield. The price earnings ratio helps to indicate to investor how expensive the shares of common stock of a firm are. Dividend yield is part of the stockholders ROI and is represented by the annual cash dividend. Dividend yields have historically been between 3% to 6% for common stock and 5% to 8% for preferred stock. Dividend payout ratio shows the proportion of the earnings paid to common shareholders. Dividend payout for manufacturing companies range from 30% to 50%, but can vary widely.