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FNCE20005 Lecture Notes - Lecture 5: Dividend, Dividend Yield, Price Drop

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School
University of Melbourne
Department
Finance
Course
FNCE20005
Professor
ALL

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Document Summary

Basics of dividends: it usually means a cash dividend (sometimes a stock dividend, the level of dividends is not xed and can be changed by the rm at any time, dividend restrictions may exist to protect creditors. Creditors want to ensure they are repaid. Company may need to place restrictions to ensure they are granted credit: companies distinguish between. Regular dividends: expected to be maintained in the future. Special dividends: less likely to be repeated: measures of dividends: Dividend per share (dps): dividend per dollar amount per share. Dividend yield: dps divided by share price. Dividends in australia: typically paid semi-annually (interim and nal, dividend announcements coincide with pro t announcements, old dividend payment rule - company must be pro table in order to pay dividend. Purpose - to protect creditors: the new dividend payment rules in 2010 replaced the traditional pro ts test with solvency test . Assets > liabilities and the excess is su cient to pay dividend.

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Related Questions

A variety of interested parties-including existing and prospective creditors (such as lenders and suppliers), employees and managers, shareholders, regulators, security anaysts, and competitors-conduct the analysis of a businesses financial condition and performance. All parties tend to be interested, to some extent, in the same aspects pf cpmpany performance, but their particular emphasis on a specfic facet of the business's condition or performance may vary.

The following parties are either currently affiliated with Global Products Inc. (GPI) or are considering becoming so. Based on the following description, (1) answer the question "Who am I?" and (2) identify the class of financial ratios that they might be interested in.

I work for another organization that is considered with its own profitability and risk exposures. This means that my ratio analysis of GPI should focus on the following.

1. GPI's _(liquidy and profitability, liquidy and debt management, asset management and market value)_ratios are important because they provide insights into its capacity to repay its loans using readily available cash in accordance with the terms of our lending agreements.

2. However, because GPI's capacity to meet this obligation is also a function of (a) its ability to generate earnings and (b) its ability to raise funds in the financial funds in the financial markets,then I must also pay close attention to its _(market value and debt management, asset management and market value, profitability and market value)__ratios, respectively.

3. GPI's ability to raise additional capital in the financial markets is strongly influenced by GPI mangement's ability to operate their organizations assets efficiently and effectively. This implies the need to monitor GPI's _(liquidty, asset management or efficiency)____ ratios.

Who am I?
I am _(an existing shareholder, an existing bank lendor or creditor, an existing supplier, an existing industry regulator)___

The decision by Blades, Inc., to Invest in Thailand

Since Ben Holt, Blades’ chief financial officer (CFO), believes the growth potential for the roller blade market in Thailand is very high, he, together with Blades’ board of directors, has decided to invest in Thailand. The investment would involve establishing a subsidiary in Bangkok consisting of a manufacturing plant to produce Speedos, Blades’ high-quality rollerblades. Holt believes that the economic conditions in Thailand will be relatively strong in 10 years when he expects to sell the subsidiary.

Blades will continue exporting to the United Kingdom under an existing agreement with Jogs, Ltd., a British retailer. Furthermore, it will continue its sales in the United States. Under an existing agreement with Entertainment Products, Inc., a Thai retailer, Blades is committed to selling 180,000 pairs of Speedos to the retailer at a fixed price of 4,594 Thai baht per pair. Once operations in Thailand commence, the agreement will last another year, at which time it may be renewed.

Thus, during its first year of operations in Thailand, Blades will sell 180,000 pairs of rollerblades to Entertainment Products under the existing agreement whether it has operations in the country or not. If it establishes the plant in Thailand, Blades will produce 108,000 of the 180,000 Entertainment Products Speedos at the plant during the last year of the agreement. Therefore, the new subsidiary would need to import 72,000 pairs of Speedos from the United States so that it can accommodate its agreement with Entertainment Products. It will save the equivalent of 300 baht per pair in variable costs on the 108,000 pairs not previously manufactured in Thailand.

Entertainment Products has already declared its willingness to renew the agreement for another 3 years under identical terms. Because of recent delivery delays, however, it is willing to renew the agreement only if Blades has operations in Thailand. Moreover, if Blades has a subsidiary in Thailand, Entertainment

Products will keep renewing the existing agreement as long as Blades operates in Thailand. If the agreement is renewed, Blades expects to sell a total of 300,000 pairs of Speedos annually during its first 2 years of operation in Thailand to various retailers, including 180,000 pairs to Entertainment Products. After this time, it expects to sell 400,000 pairs annually (including 180,000 to Entertainment Products). If the agreement is not renewed, Blades will be able to sell only 5,000 pairs to Entertainment Products annually, but not at a fixed price. Thus, if the agreement is not renewed, Blades expects to sell a total of 125,000 pairs of Speedos annually during its first 2 years of operation in Thailand and 225,000 pairs annually thereafter. Pairs not sold under the contractual agreement with Entertainment Products will be sold for 5,000 Thai baht per pair since Entertainment Products had required a lower price to compensate it for the risk of being unable to sell the pairs it purchased from Blades.

Holt wishes to analyze the financial feasibility of establishing a subsidiary in Thailand. As a Blades’ financial analyst, you have been given the task of analyzing the proposed project. Since future economic conditions in Thailand are highly uncertain, Holt has also asked you to conduct some sensitivity analyses. Fortunately, he has provided most of the information you need to conduct a capital budgeting analysis. This information is detailed here:

-The building and equipment needed will cost 550 million Thai baht. This amount includes additional funds to support working capital.

-The plant and equipment, valued at 300 million baht, will be depreciated using straight-line depreciation. Thus, 30 million baht will be depreciated annually for 10 years.

-The variable costs needed to manufacture Speedos are estimated to be 3,500 baht per pair next year.

-Blades’ fixed operating expenses, such as administrative salaries, will be 25 million baht next year.

-The current spot exchange rate of the Thai baht is $.023. Blades expects the baht to depreciate by an average of 2 percent per year for the next 10 years.

-The Thai government will impose a 25 percent tax rate on income and a 10 percent withholding tax on any funds remitted by the subsidiary to Blades. Any earnings remitted to the United States will not be taxed again.

-After 10 years, Blades expects to sell its Thai subsidiary. It expects to sell the subsidiary for about 650 million baht, after considering any capital gains taxes.

-The average annual inflation in Thailand is expected to be 12 percent. Unless prices are contractually fixed, revenue, variable costs, and fixed costs are subject to inflation and are expected to change by the same annual rate as the inflation rate.

Blades could continue its current operations of exporting to and importing from Thailand, which has generated a return of about 20 percent. Blades require a return of 25 percent on this project in order to justify its investment in Thailand. All excess funds generated by the Thai subsidiary will be remitted to Blades and will be used to support U.S. operations.

Holt has asked you to answer the following questions:

1. Should the sales and the associated costs of 180,000 pairs of rollerblades to be sold in Thailand under the existing agreement be included in the capital budgeting analysis to decide whether Blades should establish a subsidiary in Thailand? Should the sales result from a renewed agreement be included? Why or why not?

Bob, Chad and Dylan had been dreaming of this day for the past six years; ever since they first met in an introductory economics course in college. For several years they had been pooling their money and buying Arizona Lottery tickets dreaming that one day they would win big. They realized that the lottery was considered by many to be a voluntary tax on the statistically challenged. But miraculously they now sat at their favorite local “watering hole” holding the winning ticket that meant they would split “The Pick” jackpot of $6 million. What a great feeling! Now they just needed to decide if they wanted to take their winnings as a lump sum now or to be paid over the next twenty in installments. Bob had been a political science major in college but things hadn’t worked out as he anticipated when he was a student. He had entered the job market at what looked now to be the bottom of the economic downturn following the housing crisis in the U.S. Bob believes he did not start his job search soon enough and found suitable openings virtually nonexistent. He was currently working part-time at an organic farm and still living at home which cramped his style consider-ably. He has $150,000 in college related loans (7% interest rate) which he cannot service based on his annual taxable income of $15,000. His share of the jackpot would allow him to be debt free and change his life for the better without doubt. Chad had been more fortunate than Bob. He had applied himself in college and earned a master of accounting degree with an emphasis in taxation. After graduation he immediately went to work for one of the international accounting firms and was now earning a taxable income of $100,000 in spite of the economic issues facing his friend Bob and the country as a whole. He too had debt but not from student loans. Chad had purchased a very nice home in Anthem, Arizona for approximately 50% of what it had sold for three years earlier when built. He had a $250,000 mortgage on the home, at a 4% interest rate, which he saw little reason to pay off since he anticipated significant inflation in the near future. Of the three friends Dylan was by far the most successful. Dylan had majored in finance and had excelled. When he graduated, although he had several attractive offers in the financial services industry, he decided to go into the family business. The company which his father and uncle had started nearly 50 years ago had done amazingly well in the downturn and since he was the only child/nephew they were rewarding him handsomely. He had been reluctant to tell Bob but he was on track to receive to- tal compensation (including bonuses) that yielded a taxable income of $300,000 this year. Unlike his friend Bob, Dylan was frugal and had taken on zero debt. He was pleased with the trio’s good fortune but he didn’t think the windfall would change his life all that much. A few days later when the euphoria of winning was subsiding the three friends met again at the same establishment. All four were obviously in good spirits and were looking forward to presenting their winning ticket to Arizona Lottery officials. Chad started the conversation by telling Bob and Dylan that he had taken the initiative of doing some basic research on how “The Pick” worked and what the payout options were. Bob, proud of his forethought, produced an article he had saved years earlier from the Arizona Daily Star with the headline “Lump-sum Lotto Payout is Best, Experts Say.” Bob excitedly told his buddies that the experts were local CPAs and that clearly the lump-sum payout was “the way to go.” Dylan said he wanted to hear what Chad had found out since he had gone to the effort of looking into the specifics. Chad (being a tax accountant) had prepared a summary of his research which follows: “A percentage of the proceeds from the sale of Lotto tickets are allocated to a prize pool. The size of the Jackpot that is prominently advertised, six million dollars in this instance, is actually only an estimate. The advertised amount is the sum of the estimated annuity1 payments, without consideration of the time value of money, which Lotto officials believe can be purchased from the prize pool. If the winner chooses the annuity payout multiple insurance companies submit bids. Officials award the bid to the insurance company that offers the largest annual payments in return for the prize pool amount. The insurance company with the best bid typically offers a rate that is near the long term U.S. Treasury Bonds rate (currently 3%). If the winner chooses the Lump Sum payout they simply receive the prize pool amount; the amount that would have been used to buy the annuity.” 1.The term annuity is actually a misnomer. Since the payments are made by the insurance company at the beginning of each of twenty periods it is an annuity due. After reading the summary Bob said he didn’t see how this related to the decision that had to be made since he didn’t see anything that changed the preferred option being that the lump-sum payout is best. Chad acknowledged that Bob was probably correct but he still wanted to “run the numbers” and suggested that Bob and Dylan should do the same. Chad reminded them that they needed to consider the tax consequences of the payout schema and then provided the following schedule of federal income tax rates and reminded them that the state tax rate was an additional 5%.Bob rolled his eyes but said he would get right on it. Dylan thanked Chad for the information and they agreed to meet again tomorrow to decide on the best course of action.

Questions 1. Prepare a personal analysis of the payout options for Bob, Chad and Dylan including their net income after taxes. Designate the preferred option for each individual and explain why.