Eastboro Analysis

1471 words 6 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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Managers are willing to return cash to shareholders in mature industries where firms have poorer investment opportunities, rather than empire-building 6. Dividend cut reveals deep troubles? Precursor to distress?
Based on the information above and the fact that , Eastboro doesn’t have any evident financial problems , due to its lower leverage policy and good earnings as well as projected growth, of 15% , at this point the residual dividend policy will have the most benefit for the firm . This will help the company invest money in the right projects, without levering up to much, and based on projected growth pay dividends later when the company has the resources.

Zero payout: This option could be justified considering company’s strong emphasis on advanced technologies and CAD/CAM. This would require huge amount of cash and would signal that the firm belonged in a class of high-growth and high-technology firms. The argument against the zero payout could be that the firm has been paying dividend for many years and zero dividend would signal loss of confidence in company’s future earnings and prospects.

40 percent payout: This will send out a strong signal to the market and shareholders that the company has conquered its problems and it is confident of its future earnings. The Wall Street Journal article during that time also cited that due to the collapse in the technology and other growth stocks, investors are attracted towards dividend-paying