Case 8: Georgia Atlantic Company: Directed QUESTIONS 1. For each of the years listed in Table 2, what is Georgia Atlantic's annual earnings per growth rate, its P/E ratio, and its market/book ratio? Compare your answers with the indust averages shown in Table 2. What can be inferred about Georgia Atlantic's dividend policy share from these data?

2. Do you think it is better for firms in general, and for Georgia Atlantic in particular, to have an announced dividend policy?

3. In general, how is a firm's growth rate in earnings affected by its dividend policy? What does this imply about Georgia Atlantic's historical rate of return on investment vis--vis that of the average lumber company? (Hint: Consider the retention growth model, g br, where g = growth rate in EPS, b = retention ratio, and r = return on equity.)

4. Evaluate the family's argument that higher-priced stocks are more attractive to investors because the percentage transactions costs on such issues are lower. Is this a valid argument? Do you think Georgia Atlantic's current per-share price is "optimal" in the sense that the value of the shares to investors is maximized?

through and have explained it to him. Junior might not want the value of the company to be maximized until after his death. Mark des not know Junior's view of this, but he does know that his tax advisors have the Atlantic breakup value," or the value of the company if it were broken up and sold in the Finally, Markowitz knows that several Wall Street firms have been analyzing has heard breakup value estimates as high as $3.500 per share, primanly because other those owned by Georgia Atlantic. Of course, Georgia Atlantic could sell assets on its own.be companies, including Japanese and European companies, are eager to buy prime properties Markowite does not expect that to happen as long as Junior is in control. Table 2 Georgia Atlantic Company Selected Company and Industry Data Earnings per Share $100 106 109 Industry MB Ratio 25 Year 1985 1990 1995 2000 Book Value Price per Share per Share $824 $1.253 1.180 1.360 1,769 1,597 2.483 1.902 Industry PE Ratio 16.8 17.9 19.1 16.5 2.6 29 25 Industry Average Compound Annual Growth Rate in Earnings per Share 1985.90 6.2% 1990.95 7.1 1995-2000 7.9 Table 3 Selected Stock Market Data Boise Cascade Cheapeake Corporation Georgia Pacific Polatch Average Payout 259 31 40 35 44 42 Average PE 7.1x 9.2 9.0 10.2 10.5 10.0 Union Camp Wechat Now assame that you are Abe Murkowitz's assistant, and that he has asked you to help wine with the analysis by answering the following questions and then by discussing your answers with The executive committee. Junior is famous for asking tough questions and then crucifying the peron being questioned if he or she has trouble responding, and that is probably why Markowitz wants you to make the presentation. So be sure that you thoroughly understand the questions, and your nuwers and that you can handle any follow-up questions that you might receive. Table 1 Georgia Atlantic Company (in Millions of dollars) Cadensed Malance Sheets for the Year Ended December 31 1990 $125.2 $26.8 2415 5.366.7 13 SA Camel Fixed as los brabite $18.0 6.7 18.6 $ 43.3 $55.9 983 36 $17 Accapable Nepable Other current fibilities Tocal current liabilities 122.0 25.0 1764 $366.7 500 Landerdele Common stock S54 Retained earnings Totalles and net worth 2.9% 2.5x 15 24x Current ratio Industry average 45.19 37.9% Debati Industry average 540 40.2 When Georgia Atlantic was originally organized, the senior Jenkins and members of family owned most of the outstanding stock. Over time, however, the family's ownership position has gradually declined due to the sale of new common stock to fund expansion. In 1995, Be Jenkins, Sr. died; the presidency of the firm was passed to his son, Ben Jenkins, Jr., who was the the time. By the end of 2000, the Jenkins family held only about 35 percent of Georgia Atlantie common stock, and this represented essentially their entire net worth The family has sought to finance the firm's growth with internally generated funds to the preatest extent possible. Hence, Georgia Atlantic has never declared a cash dividend, norast had a stock dividend or a stock split. Due to the plowback of earnings, the stock currently sells fix almost $2.000 per share. The family has stated a strong belief that investors prefer low payou ticks because of their tax advantages, and they also think that stock dividends and stock in were no useful purpose-they merely create more pieces of paper but no incremental value for Seemse the percentage brokerage commissions on small purchases of higher-priced socks shareholder. Finally, the family feels that higher-priced stocks are more attractive to live lower than on large purchases of lower-priced shares. They cite the example of Berk Hinaway, whose stock price has risen phenomenally even though it now sells for thousands dilars per share and pays no dividends. The family does acknowledge, though, that are Buffet Berthie's chairman, has done a superb job of managing the company's assets and the Gobbe the corporale secretary, informed Ben Jenkins, Jr., who is commonly called "Juniors As the date for Georgia Atlantic's annual stockholders' meeting approached, Mary the company that usually low number of shareholders had sent in their proxie Goulder felt at this might be dae 10 sing discontent over the firm's dividend policy. During the last dance, those to pay a dividend in 2000. The Jenkins family was also aware that percent yet for the 39th might year. Georgia Atlantic's board, under the Jenkins fam aan die we payout for firms in the paper and forest products industry has been abur tense of its mock reflects that factor as well as Buffett's financial policies.) through and have explained it to him. Junior might not want the value of the company to be maximized until after his death. Mark des not know Junior's view of this, but he does know that his tax advisors have the Atlantic breakup value," or the value of the company if it were broken up and sold in the Finally, Markowitz knows that several Wall Street firms have been analyzing has heard breakup value estimates as high as $3.500 per share, primanly because other those owned by Georgia Atlantic. Of course, Georgia Atlantic could sell assets on its own.be companies, including Japanese and European companies, are eager to buy prime properties Markowite does not expect that to happen as long as Junior is in control. Table 2 Georgia Atlantic Company Selected Company and Industry Data Earnings per Share $100 106 109 Industry MB Ratio 25 Year 1985 1990 1995 2000 Book Value Price per Share per Share $824 $1.253 1.180 1.360 1,769 1,597 2.483 1.902 Industry PE Ratio 16.8 17.9 19.1 16.5 2.6 29 25 Industry Average Compound Annual Growth Rate in Earnings per Share 1985.90 6.2% 1990.95 7.1 1995-2000 7.9 Table 3 Selected Stock Market Data Boise Cascade Cheapeake Corporation Georgia Pacific Polatch Average Payout 259 31 40 35 44 42 Average PE 7.1x 9.2 9.0 10.2 10.5 10.0 Union Camp Wechat Now assame that you are Abe Murkowitz's assistant, and that he has asked you to help wine with the analysis by answering the following questions and then by discussing your answers with The executive committee. Junior is famous for asking tough questions and then crucifying the peron being questioned if he or she has trouble responding, and that is probably why Markowitz wants you to make the presentation. So be sure that you thoroughly understand the questions, and your nuwers and that you can handle any follow-up questions that you might receive. Table 1 Georgia Atlantic Company (in Millions of dollars) Cadensed Malance Sheets for the Year Ended December 31 1990 $125.2 $26.8 2415 5.366.7 13 SA Camel Fixed as los brabite $18.0 6.7 18.6 $ 43.3 $55.9 983 36 $17 Accapable Nepable Other current fibilities Tocal current liabilities 122.0 25.0 1764 $366.7 500 Landerdele Common stock S54 Retained earnings Totalles and net worth 2.9% 2.5x 15 24x Current ratio Industry average 45.19 37.9% Debati Industry average 540 40.2 When Georgia Atlantic was originally organized, the senior Jenkins and members of family owned most of the outstanding stock. Over time, however, the family's ownership position has gradually declined due to the sale of new common stock to fund expansion. In 1995, Be Jenkins, Sr. died; the presidency of the firm was passed to his son, Ben Jenkins, Jr., who was the the time. By the end of 2000, the Jenkins family held only about 35 percent of Georgia Atlantie common stock, and this represented essentially their entire net worth The family has sought to finance the firm's growth with internally generated funds to the preatest extent possible. Hence, Georgia Atlantic has never declared a cash dividend, norast had a stock dividend or a stock split. Due to the plowback of earnings, the stock currently sells fix almost $2.000 per share. The family has stated a strong belief that investors prefer low payou ticks because of their tax advantages, and they also think that stock dividends and stock in were no useful purpose-they merely create more pieces of paper but no incremental value for Seemse the percentage brokerage commissions on small purchases of higher-priced socks shareholder. Finally, the family feels that higher-priced stocks are more attractive to live lower than on large purchases of lower-priced shares. They cite the example of Berk Hinaway, whose stock price has risen phenomenally even though it now sells for thousands dilars per share and pays no dividends. The family does acknowledge, though, that are Buffet Berthie's chairman, has done a superb job of managing the company's assets and the Gobbe the corporale secretary, informed Ben Jenkins, Jr., who is commonly called "Juniors As the date for Georgia Atlantic's annual stockholders' meeting approached, Mary the company that usually low number of shareholders had sent in their proxie Goulder felt at this might be dae 10 sing discontent over the firm's dividend policy. During the last dance, those to pay a dividend in 2000. The Jenkins family was also aware that percent yet for the 39th might year. Georgia Atlantic's board, under the Jenkins fam aan die we payout for firms in the paper and forest products industry has been abur tense of its mock reflects that factor as well as Buffett's financial policies.)