Dividend Policy

2425 Words Dec 16th, 2011 10 Pages
Question 1

If we take a look at the company’s compounded annual growth rate in EPS we can see that Georgia Atlantic’s growth rate is really low compared to the industry average. Furthermore we can see from the first table that Georgia Atlantic’s P/E ratio is also lower in all the years as compared to the industry and the M/B ratio is also relatively low compared to the industry. Due to the fact that Georgia Atlantic is operating in a relatively mature market, there is a very low possibility for growth, that’s why we consider Georgia Atlantic as a low growth company. For low growth companies it is normal to have a low P/E ratio and a low B/M ratio because most of the company’s value comes from their current operations and assets. Because
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Highly levered firms look forward to maintaining their internal cash flow to fulfill duties, instead of distributing available cash to shareholders and protect their creditors. This is because firms with high leverage ratios have high transaction costs, and are in a weak position to pay higher dividends to avoid the cost of external financing. While firm value can be increased by financial leverage, too much leverage leads to a shrinking company value as bankruptcy costs start to outweigh tax shield benefits. The higher risk makes debt holders asking for higher returns to compensate them for the increase in bankruptcy risk. Since dividend payments reduce the amount of capital available to secure the debt, many debt contracts include restrictions on dividend payments. Bond indentures restrict dividend payments subject to minimum safety ratios. These two effects, the higher costs of debt and the restrictions to pay dividends have, of course, a direct effect on the company’s ability to pay dividends. The high leverage of Georgia Atlantic, which is well above its industry average, reduces the possibilities for the firm in terms of its dividend policy. Holding Georgia Atlantic’s dividend payout history in mind, it might seem to be a bad time to start thinking about a policy change.
Question 6 1) No Cash Dividends, No Stock Dividends or Split
This strategy is not recommendable because firstly the

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