Introduction

1. Refer to Figure 1. Would you state that Montgomery’s policy up to now has been to pay a changeless dividend. with occasional additions as the company grows?

Montgomery has maintained the dividend policy of paying a regular dividend to their stakeholders. This steady dividend policy additions every clip the house produces. Since 200. the sum committed to paying dividends has grown each twelvemonth. but peculiar accent has been placed on the figures that show dividends paid on every portion. In 2000. they paid $ 1. 36. 2001 they paid $ 1. 48. 2002 they paid $ 1. 70. 2003 and 2004 the house paid $ 1. 76 each twelvemonth. and in 2005 it paid dividend per portion of $ 1. 96 demoing a steady addition over the six old ages. The top-level direction has been confident about the invariable or little one-year addition of the DPS because of the annual rise in the overall figure of portions every twelvemonth since 2000 ( Baker. 2009 ) .

1. Refer to Figure 2. What type of dividend policies would you state are being practiced by Montgomery’s rivals in the retailing industry? Do you believe that any houses are following a residuary policy?

J. C. Penney

1999 2000 2001 2002 2003 2004 2005

EPS $ 2. 75 $ 2. 94 $ 3. 13 $ 2. 91 $ 2. 66 $ 3. 53 $ 4. 70
DPS $ 0. 92 $ 1. 00 $ 1. 08 $ 1. 18 $ 1. 18 $ 1. 24 $ 1. 48

Payout Ratio 33. 5 % 34. 0 % 34. 5 % 40. 6 % 44. 4 % 35. 1 % 31. 5 %

Dollar General

1999 2000 2001 2002 2003 2004 2005

EPS $ 0. 38 $ 0. 61 $ 0. 81 $ 1. 10 $ 0. 95 $ 0. 23 $ 0. 30
DPS $ 0. 09 $ 0. 11 $ 0. 13 $ 0. 17 $ 0. 20 $ 0. 20 $ 0. 20

Payout Ratio 23. 7 % 18 % 16. 1 % 15. 5 % 21. 1 % 87. 0 % 66. 7 %

Wal-Mart Shops

1999 2000 2001 2002 2003 2004 2005

EPS $ 0. 16 $ 0. 23 $ 0. 35 $ 0. 48 $ 0. 58 $ 0. 80 $ 1. 10
DPS $ 0. 02 $ 0. 02 $ 0. 04 $ 0. 05 $ 0. 07 $ 0. 09 $ 0. 12

Payout Ratio 12. 5 % 8. 7 % 11. 4 % 10. 4 % 12. 1 % 11. 3 % 10. 9 %

The chief rivals that Montgomery has been viing with are Wal- marketplace. J. C Penney. and Dollar General. The two houses are utilizing the same policy used by Montgomery as they strive to increase their dividend per portion each twelvemonth. In 2004. despite Net incomes per portion. reduction by over 75 % the dividend per portion was held at $ 0. 20. The dollar increased their net incomes by more than 17 % despite the EPS decreasing by 14 % .

It is clear that a growing and stable dividend are critical factors considered by any turning retail company. We see that Wal-Mart. which is the biggest retail industry. besides ignores stressing on capital growing as they go for stableness in dividend and growing. The same instance applies to J. C Penney. who maintains a stable dividend per portion despite fluctuations in EPS. Montgomery has the highest mean payout ratio compared to even Wal-Mart because of the long period they have been in the industry and with the same dividend policy. their DPS addition every twelvemonth ( Baker. 2009 ) .

Question Two

1. Calculate the expected return to the common shareholders under the firm’s present policy. given an expected dividend following twelvemonth of $ 2. 10 and a growing rate of 7. 1 per centum. Montgomery’s stock presently sells for $ 35.( Use the dividend growing theoretical account) : Expected return ( K_{vitamin E}) = D₁/ P₀+ g

Calciferol₁= $ 2. 10.

g = 7. 1 % .

Phosphorus₀= $ 35. K_{vitamin E}.

Expected return to stockholder = $ 2. 10/ $ 35 + 7. 1 % = 6+ 7. 1 = 13. 1 %

1. Assume that. if Don Jackson’s proposal were adopted. following year’s dividend would be zero. but net incomes growing would lift to 14 per centum. What will be the expected return to the shareholders ( presuming the other factors are held changeless ) ?

Adopting Don’s suggestion will see the Stockholders earn no dividend at all. but the growing will increase by 14 % with an expected return staying the same as the growing rate.

Expected Return to Stock holders= 0/ $ 35+ 14 % = 14 % .

Don’s suggestion will see the stakeholders enjoy an extra 0. 9 % on their expected return. therefore the demand to see the advantages of Don’s policy. Therefore. the house can non wholly ignore the thought of altering to a residuary dividend policy. On the other manus. the same shareholders will merely do a 14 % addition by selling their portions yet the current dividend policy earns them a 13. 1 % . Since there are no advantages enjoyed by capital addition as a consequence of bing statute law. so it could be wise for the Company to keep the dividend policy they are utilizing. This is because the stockholders could merely profit from residuary dividend policy if the house grew to 14 % a fact that is merely guess. If the growing autumn below13. 1 % so the current system is still the best ( Baker & A ; Filbeck. 2012 ) .

Question three

Don’s suggestion supports the fact that dividend and capital budget should be paid from the current year’s net income. a instance that is untrue. This happens because the house is being limited by the hard currency they are keeping. The company’s balance in 2005 was $ 3. 235. 000 being the maximal sum that can be paid to the capital budget together with a dividend without holding to outsource for financess or sell its bing assets. Paying dividends from retained net incomes will coerce houses to sell their belongings since they are non difficult hard currency ( Baker & A ; Filbeck. 2012 ) .

Question four

1. Don says the cost of the outside funding is more expensive than the cost of internal funding. due to the floatation costs charged by investing bankers. Given the information you have. what would you state is the firm’s cost of internal equity funding?

The cost of borrowing from outside beginnings will merely be higher because of costs incurred during floatation.

1. Assume Montgomery can sell bonds priced to give 13 per centum. What is the firm’safter-tax cost of debt? ( The revenue enhancement rate is 25 per centum.

Chemical bonds yield=13 % . Therefore. after revenue enhancement cost = 13 % . multiply by ( 1-0. 25 ) = 9. 75 % .

1. Given the cost of debt and the cost of internal equity funding. why doesn’t Montgomery merely borrow the entire sum needed to fund the capital budget and the dividend every bit good.

Borrowing money for capital budget and dividend will impact the debt-equity. doing it to be out of proportion as it will increase the cost of funding of debts every bit good as the costs of all other fiscal agencies ( Baker & A ; Filbeck. 2012 ) .

Question five

Make you travel along with Clarence Autry’s remark that it is what the shareholders want that counts. non their entire rate of return? Why or why non?

Mr. Autry is against the residuary dividend policy. This means that the stockholders will non hold a say or penchant on the type of refund they receive for puting in Montgomery every bit long as they earn the highest returns. If they are given the chance to take. they will non travel for that policy. There are no regulations for finding whether stockholders can hold a penchant or how much they will profit from it. therefore doing the issue really controversial. But the retailing industry as shown in the figures above for Wal-mart. J C Penney and dollar. they give stockholders a penchant which is taking the current dividend paid instead than puting the hard currency in more attractive investings ( Baker & A ; Filbeck. 2012 ) .

Question six

Barbara Reynolds suggests that. if hard currency is needed for the capital budget. a stock dividend could be substituted for a hard currency dividend. Make you hold? How do you believe the shareholders would respond? Regardless of their reaction. is the stock dividend an tantamount replacement for a hard currency dividend?

Equally much as the house is in a place to pay portion dividend and non hard currency dividend. non all shareholders will be comfy for some will experience that nil was really paid to them. This is so because the portion dividend is merely but a mere paper which the stockholders sign to make more portions. This could merely go good if it increased the stockholders entire hard currency dividend which will travel into the function of a stock dividend to conserve financess ( Baker. 2009 ) .

Question seven

After all is said and done. make you believe the firm’s dividend policy affairs? If so. what do you believe Montgomery’s policy should be.

Whether traveling for residuary dividend policy or payment of a hard currency dividend. every fiscal analyst has his or her positions. Many would reason that borrowing to put instead than utilizing the available money would increase costs due to flotation that are associated with borrowing from outside beginnings therefore need to travel for a residuary dividend policy. On the other manus. Montgomery being an old house that is used to the current dividend policy will be better off lodging to it. Consequently. leave residuary dividend policy for new emerging retail companies ( Baker. 2009 ) .

Mentions

Baker. K. ( 2009 ) .‘Dividends and Dividend policy. ’eighthedition. Harvard Business School Press: New York.

Baker. K. & A ; Filbeck. G. ( 2012 ) .‘Alternative investings: Instruments. Performance. Benchmark and Strategies. ’2nd edition. Harvard Business School Press: New York.