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What happens to Gainesboros financing need and unused debt capacity if:
no dividends are paid?
a 20% payout is pursued?
a 40% payout is pursued?
a residual payout policy is pursued?
Length:
Max 1000 words, excluding figures/tables/references.
Due Date:
Friday week 8 at 17:00 hrs EST.
15% Growth
20% Dividend
10% Growth
15% Growth
30% Dividend
10% Growth
15% Growth
40% Dividend
10% Growth
15% Growth
Commitment?
Value-oriented investors (13%) & Long Term retirees (26%) require dividends
EPS falls from 1.03 to almost 0 negative signalling this sends to shareholders/the
market
40% Payout
Pros:
Cons:
Residual Payout
Pros:
Cons:
Thus Gainesboro should consider residual policy to help set their long run target payout
rations, but not as a guide to the dividend payout in any one year
Theory - MM says that firm value is irrelevant of payout policy. Except to the
extent that it may influence real investment decisions. This may occur because
incomplete information/asymmetric information
o Problem of adverse selection
Credibly signals the firms true value
o Eliminating the FCF creates incentives for managers to pick only the best
+NPV projects
Analysis How to pay out? Div vs Repurchase?
o Repurchase is more flexible do them whenever you want
Open market repurchases buy over time
Recap benefits of signalling, but no commit to a set payout level
o Managers only sell you a stock when its overvalued
o Managers will only buy a stock from you when its undervalued
If firm has excess FCF and unused debt capacity vulnerable to hostile take-over
or potential leverage buyout
o Showed the paper I have uploaded by Deangelo, Deangelo & Sknner (ch13
pg 429 pt 4) when discussing this