Essay on Eastboro Analysis

1450 Words6 Pages
1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock. Which of these three elements is Eastboro management willing to vary, and which elements remain fixed as a matter of policy?

Management is willing to vary their investment (investing less) as well as issue more stock. This is not against their policy. But the management would not be willing to borrow more as their borrowing policy is limited to 40% debt to equity ratio.

2. What happens to Eastboro's financing need and unused debt capacity if
a. No dividends are paid?
If no dividend are paid, the company does not need financing required for the dividends. Hence the company’s financing needs
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Based on the financing needs, as above dividends would be additional stretch on company finances

3. How might Eastboro's various providers of capital, such as stockholders and creditors, react if Eastboro declares a dividend in 2001?

If Eastboro declares a dividend in 2001, it will have to take debt to raise the money required for the dividend. The creditors will not react positively with this decision because the money is not being used in the increasing the value of the company. On the other hand, the stockholders will react positively as the dividend payout reflects confidence of managers in the future earnings of the company and also gives the stock holders flexibility to invest their dividend earnings in other companies .

4. What are the arguments for and against the zero payout, 40 percent payout, and residual payout policies? What should Jennifer Campbell recommend to the board of directors with regard to a long-run dividend payout policy for Eastboro Machine Tools Corporation?
Stock prices increase on average when firms announce
- Increases in dividends (around 2%)
- Dividend initiations (around 3%)

Stock prices decrease on average when firms announce
- Decreases in dividends (around -2.5%)
- Dividend omissions (around -9.5%)
What the market learns from dividend changes may depend on the firm’s particular circumstances:

1. The firm wishes to attract attention: 2. Div increase signals mgmt confidence 3. The

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