Georgia Atlantic Company Essay

4271 WordsApr 13, 201318 Pages
Case 19 Georgia Atlantic Company Dividend Policy CASE INFORMATION Purpose The purpose of this case is to have students examine dividend policy--cash dividends, stock splits, and stock dividends--from the viewpoint of its effect on corporate share prices. Time Required About one and a half hours of student preparation. If the case is to be written up and handed in, double the time required. Complexity A--relatively simple. Flexibility This case can be used in several ways. In the introductory course, the case can be used as the basic structure for a lecture or as a written assignment in conjunction with lecture and text material. In our more advanced courses, which usually have smaller enrollments,…show more content…
This could be expected to lower the cost of equity capital somewhat, and thus, to increase the price of the stock. However, if a company is in an unstable position, where it does not know its appropriate dividend policy and might well have to change the announced policy, then it is generally best not to announce a policy. In other words, announcing a policy and then changing it within a fairly short period would create more investor uncertainty than simply not announcing a policy in the first place. Question 3 A high dividend payout policy reduces the rate of growth in earnings, g = br. For any rate of return on investment (r), the larger the payout ratio (the smaller the value of b), the slower the rate of growth. Lumber firms in general (Georgia Atlantic is an exception) have approximately a 35 percent payout ratio. Since the other companies have, on average, been growing at a rate of about 7 percent annually over the last twenty years, versus an average growth rate of 2.47 percent for Georgia Atlantic, it is clear that Georgia Atlantic's ROE on investment is substantially below the industry average. Georgia Atlantic: b = 1.0; g = br = (1.0)(r) = 2.47%, so r = 2.47%. Industry: b = 0.65; g = br = (0.65)(r) =

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