To determine whether your firm should change its dividend policy, based on an analysis of its investment opportunities and comparable firms.

Key Questions

• How much could this firm have returned to its stockholders over the past few years?

How much did it actually return?

• Given this dividend policy and the current cash balance of this firm, would you push the firm to change its dividend policy (return more or less cash to its owners)?

• How does this firm’s dividend policy compare to those of its peer group and to the rest of the market?

Framework for Analysis 1. Cash Return to Stockholders

• How much has the firm paid out in dividends each year for the past few years?

• How much stock has it bought back each year for the past few years?

• Cumulatively, how much cash has been returned to stockholders each year for the past few years?

2. Affordable Dividends

• What was the FCFE that this firm had over the last few years?

• What is the current cash balance for this firm?

3. Management Trust • How well have the managers of the firm picked investments, historically?
(Look at the investment return section.)
• Is there any reason to believe that future investments of this firm will be different from the historical record?
4. Changing Dividend Policy • Given the relationship between dividends and FCFE and the trust you have in the management of this firm, would you change this firm’s dividend policy?
5. Comparing to Sector and Market

• Relative to the sector to which this firm belongs, does it pay too much or too little in dividends? (Do a regression, if necessary.)
• Relative to the rest of the firms in the market, does it pay too much or too little in dividends? (Use the market regression, if necessary.)
Getting Information on Analyzing Dividend Policy You can get the information that you need to estimate FCFE and returns on equity from past financials. You will also need a beta (see risk and return section) and a debt ratio (see risk and return section) to estimate the free cash flows to equity. Finally, you will need stock returns for your stock and the returns on a market index over the period of your analysis.
Online Sources of Informationwww.stern.nyu.edu/~adamodar/cfin2E/project/data.htm.