Critique for Fpl Group Inc's Case

1220 Words May 3rd, 2011 5 Pages

Corporate Finance

Generally, the report team have a well-presented PowerPoint presentation about their analysis of dividend policy at FPL group Inc. They have demonstrated the process of how they come up with these results briefly. They have also examined the company’s history, financial figures and some related industry information, and gave reasonable recommendations. The report team expected that the company would most likely to hold their currently dividend policy and suggested their clients to sell the company shares in short term.

However, we strongly suggest that the report team should include more relevant financial calculations to backup their point of views; in addition, the application of theory was not aliment
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Eventually, the value of the company is only depending upon its investments. The residual-the different between company’s profits and investments- is then the net cash that can be paid out to company investors. The form of the payout is disregarded-“”shareholders are equally happy with a dollar of dividend or a dollar of paid out to repurchase shares” (Pearson, 2009, p.329)

Therefore, from the perspective of company shareholders, even though FRL might have to cut back their dividend due to the market conditions , according to MM’s the irrelevance of payout policy theory, company shareholder’s wealth would not be affected by the dividend cut decision.

From the company’s point of view, in practice, if FRL keep paying high dividend, its retained profits are insufficient to meet its investment or operational needs, for example, the fund are unable to meet the expected increase of demand for the upcoming years, or paying off their cost of debt, then FRL might have to consider raising fund externally if they are not considering increasing the fund that are available internally by reducing its dividend. The flotation costs incurred by raising fund externally could be quite substantial. Pearson (2009) argued

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