Eastboro

In: Business and Management

Submitted By andymm
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Pages 3
How Eastboro’s Stock was affected after the events of Sept.11.
The events of September 11th, 2001 had caused Eastboro’s stock to drop by eighteen percent and earning since 1996 had been considerably less than the previous five years in which the firm enjoyed high earnings and stable dividend growth. Jennifer Campbell, CEO of Eastboro Machine Tools Corporation, faced the important question of whether to use the company’s funds to pay dividends or use the funds to repurchase shares? We would recommend the company to pursue a zero-dividend payout policy since the company is a growth firm.
The only method of generating funds Eastboro’s management would be willing to undertake under their current policy is issuance of stock. This has negative connotations for shareholders because stock issuance would dilute shareholder equity
If Eastboro were to have a zero dividend policy, after two years they would be able to generate excess cash rather than borrowing for their financing needs. There would be no additional debt added and excess cash would be used to pay off existing debt. If the firm were to pursue a twenty percent payout policy they would borrow for four years and have excess cash for three years. If the company were to pursue a forty percent payout policy they would have to borrow for six years and would have excess cash for one year. If the company pursued a residual policy, it would result in all retained earnings being paid out as dividends, and is therefore, unfavorable at this time because all retained earnings increase shareholder value. Shareholder value is taxed as a capital gain for shareholders. This is lower than the tax bracket for personal income, which is how dividends are taxed.
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