Corporate Finane

Final Assignement

1)

Based on the information we have, and by applying the recommendations of Tom with the one time issuing of extra cash; the value of the stock price will be affected by the amount of the dividend. Meaning that if the company pays 3 dollars as dividend, the stock price will decrease by 3 dollars. As far as the value of the company is concerned, it will also decrease since there is a transfer of wealth from the company to the shareholders.

2)

The strategy of Jessica to use the extra cash to pay debt and do upgrades will have a long-term effect on the growth of the company because it will send a good message to the market. By contrast, paying an extra dividend might tell the market that the company does not really know how to use the extra cash they have, and this might scare away potential investor.

3)

Doing a share repurchase in the correct way is like the issuance of cash dividend with the same effect on shareholder financial position. However, a share repurchase is done in a way that does not affect the wealth of shareholders, meaning it does not increase or reduce their wealth. For that reason, we can say that the argument of Nolan about the increase of the ROA and ROE is not correct. The P/E ratio might go up, but the value will be brought back to normal automatically by the corrections of market.

4)

The plan discussed by Tom, Jessica and Nolan about having a regular dividend payment for shareholder might be a god idea. A regular dividend policy indicates to the market a commitment to the interest of the shareholder by the company. In that sense, if they are making the commitment to pay a regular dividend, we will have to check the strategy that aligned with that policy. Some questions that I can ask myself will be related to