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英国的KAPA SA是在木材领域的开拓者之一。它拥有大量的林木业，林地相对于其他同业也丰富。不过，该公司并没有足够的生产能力来使用保存的木材。因此，KAPA SA销售的木材只是原料，其他木材公司比它多元化，所以这个期刊缺乏比较明显的利润收益。
CASE STUDY
KAPA SA is one of the pioneers in the field of timber in Britain. It holds large quantities of timber and forest land in relation to others in the industry. However, the company has not sufficient manufacturing capacity to use the timber that holds. Consequently, KAPA SA sells wood as raw material to other timber companies, lacking any significant returns.
The company showed strong growth of sales and assets. This rapid growth, however, caused some financial problems as presented in Table 1. The condensed balance sheets presented in the table show that the company has significantly increased their financial leverage over the past 10 years, while liquidity has declined during the same period. For example, the company purchased an area of 10,000 acres in 1971. The value of this land is valued today at £ 2.750 per acre, while the book value is only £ 230 per acre.
TABLE 1
KAPA SA
Condensed Balance sheet in December 31st (millions of £.)
1991 2001
Current Assets 1125.2 265
Fixed Assets 2241.5 813.4
Total Assets 3366.7 1.078,4
Accounts payable 118 55.9
Notes Payable 66.7 98.3
Other short-term obligations 118.6 23.6
Total short-term obligations 443.3 177.8
Long-term obligations 1122 404
Common Equity 225 50
Undistributed Profits 1176.4 446.6
Total liabilities and equity 3366.7 1.078,40
Moreover given the following information:
1991 2001
Liquidity ratio 2.9 1.5
Average in industry 2.5 2.4
Debt Ratio 45,10% 54,00%
Average in industry 37,90% 40,20%
When the company originally was organized, the largest proportion of its capital was owned by the family of the founder. However, over the years, the percentage ownership of the family was gradually reduced due to the sale of new common shares to raise new capital. At the end of 2001, the family of the founder was in possession of only 35% of the shares.
The company had funded the development using internal funds. Therefore, it had never distributed dividends. Due to the reflows of the profits within the company itself, the share price had risen to £ 200 per piece. The family believed strongly that investors prefer stocks with low dividends because of their tax advantages and that the dividend in the form of shares (stock dividend) and the stock split will not offer any benefits to shareholders. Furthermore, the family believed that stocks with high price are more attractive to investors due to less transaction costs as it considers that the rate of commission charged by brokers is less if a small number of expensive shares was to be purchased than a large numbers of cheap shares (equal physical stock value).
However, the company's board has realized that the last time there was a growing dissatisfaction with the company's dividend policy. During the last two years, the average rate of profit distributions for this industry is 35%. However, the Board of the Company under the influence of the founder decided not to distribute dividends in 2002. In addition there was a rumor that the company had become a potential target for acquisition. As the founder did not want to lose control of the company, he decided that the wisest thing to do is to keep their shareholders as happy as possible. Consequently, it was announced to the directors that in a special meeting they will discuss the issue of a possible change in dividend policy of the company.
The founder asked the Chief Financial Officer (CFO) to identify and evaluate alternative dividend policies and present them to the special meeting. More specifically requested to consider issues related to cash dividends, stock dividends and stock splits. Then, the finance director presented the following proposals:
1. Do not pay a dividend, in the form of stock dividend or non-stock split. The CFO was pretty sure that founder would support this entry, both for the reasons outlined above, and because, as shown by the balance sheet, the company was not able to pay dividends in cash.
2. Direct payment of a dividend, but no dividend in the form of shares or split shares. If such a policy was adopted the amount of the dividend is a subject of debate.
3. Direct payment of a dividend, and a large stock split. The stock split will be designed in a way to reduce the share price and reach the levels of the shares of companies in the same industry ranging from £ 20 to £ 40.
4. Direct payment of a dividend, plus a large temporary stock dividend. The logic of this policy is similar to the previous one.
5. Payment of cash dividend, stock split and periodic stock dividends. This policy would require for the company to pay cash dividends directly and simultaneously announce a big stock split. After the immediate payment of a dividend and the stock split or stock dividend, the company will periodically pay smaller dividends in the form of shares, equal to the value of the remaining profits during this period. As a result of this policy, if the company wins £ 3 per share for any given period, quarterly, semiannual, etc. and withhold £ 1.50 per share, should also pay a stock dividend in the form of shares at a rate that is equal to £ 1.50 divided by the market value of the share. Therefore, if the stock trades for £ 30 when the cash dividend is paid then an extra 5% in the form of stock dividend will be distributed.
6. Draft repurchases shares. This plan is based on the belief that investors as a whole would prefer to distribute some cash, but not in the form of dividends, because they want to minimize the tax they pay. Under this plan, investors will decide whether they want to sell shares and how many, earning cash.
Consider the data shown in Tables 2 and 3. A first question is the impact of dividend policy on share price and what conclusions can be drawn if we compare the new price with the prices of other shares. Furthermore, note that for tax purposes may not be in the interest of the company founder to gain extra value at this time because the founder is old and likely will die soon. Tax advisers have already advised him about this.
The various estimates of stock analysts are that the company can be broken into parts and then can be sold separately. In this case, analysts estimate that the company's stock will be traded for £ 350 each, and several companies from home and abroad will be interested in acquiring land owned by the company. Answer the questions below.
TABLE 2
KAPA SA
Year Earnings per share Share book value Stock
price
value Ρ/Ε Industry index Industry Ρ/ΒV index**
1986 90 82 120 17 2.3
1991 102 117 135 17.5 2.4
1996 112 180 160 18.9 2.9
2001 140 255 200 16.8 2.3
** Index of Market Price to Book Value
Average cumulative annual growth rate of profits per share (EPS) in the industry:
1986-1991 5.9%
1991-1996 7.0%
1996-2002 8.1%
Table 3
Selected data stock market
Average Distributed Profits Average Ρ/Ε
Χ S.A. 22% 6.9
Υ S.A. 29% 8.9
Γ S.A. 42% 9.3
Ζ S.A. 33% 9.9
Μ S.A. 43% 10.2
Β S.A. 40% 10.1
REQUIRED
1. Find out what is the annual growth rate in earnings per share, the P / E ratio and the P / BV ratio for each of the years in Table 2. Compare your answers with the sectoral averages shown in Table 2. What can be drawn as a conclusion for the dividend policy of the company from these data?
2. Would you recommend generally that companies have pre-announced dividend policies and explain your reasoning, as well as in the case of KAPA SA.
3. How is the growth rate of profits affected by a company's dividend policy? What does this mean for the historical performance of the investment by KAPA SA relative to the one of sector’s average? (Hint: consider the model of growth Retained earnings (Retention growth model) g = b * ROE, where g = growth rate of earnings per share, b = percentage of retained earnings and ROE = return on equity.)
4. Review the founder’s argument that shares at high prices are more attractive to investors because the transaction costs as a percentage of the total value is smaller. Is this as a valid argument? Do you think that under the current share price shares’ value is maximized?
5. How does financial leverage affect a company’s dividend policy generally as well as in the case of KAPA SA?
6. Critically evaluate the alternative dividend policies that have been proposed. Discuss the impact of these policies in KAPA SA.
7. Do you think that the company is a potential target hostile takeover? How would the dividend policy be affected if the company becomes the target of a takeover? How could the company be protected from this threat through the restructuring of its assets?
8. Consider the tax status of the founder. What new parameter is introduced in your analysis?
9. How would you describe the company's shareholders? What effect has the composition of shareholders in a company's dividend policy?
10. What dividend policy should the company follow?
a. First, should the company go for a stock split and / or distribute a stock dividend?
i. If so, how big should it be?
b. Secondly, will they need to sell some assets?
i. if they do so, then the proceeds will be used to pay dividends, repay debt, build new factories or something else?
ii. Finally, if you believe that cash dividends should be paid, how big should be the initial payment?
iii. What dividend growth rate should be set as a goal?
iv. Should this change in policy to be communicated?
If you think you do not have enough information to give a precise quantitative answer to any part of the question, explain what you will analyze if you had access to all company data and internal information.
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