Live Case Study The Trade Off on Dividend Policy

Objective: To examine how much cash your firm has returned to its stockholders and in what form (dividends or stock buybacks), and to evaluate whether the trade off favors returning more or less.

Key Questions:

• Has this firm ever paid out dividends? If yes, is there a pattern to the dividends over time?

• Given this firm's characteristics today, do you think that this firm should be paying more dividends, less dividends or no dividends at all?

Framework for Analysis:

1. Historical Dividend Policy

• How much has this company paid in dividends over the last few years?

• How have these dividends related to earnings in these years?

2. Firm Characteristics

• How easily can the firm convey information to financial markets? In other words, how necessary is it for them to use dividend policy as a signal?

• Who are the marginal stockholdera in this firm? Do they like dividends or would they prefer stock buybacks?

• How well can this firm forecast its future financing needs? How valuable is preserving flexibility to this firm?

• Are there any significant bond covenants that you know of that restrict the firm's dividend policy?

• How does this firm compare with other firms in the sector in terms of dividend policy?

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