Case Study STRIDES ARCOLAB LIMITED'S DIVIDEND PAY-OUTDECISION:

THE CASE IS BELOW,

On December 10, 2013, Arun Kumar, founder and group chief executive officer of Strides Arcolab Limited (Strides) a first generation, Indian pharmaceutical company headquartered in Bengaluru prepared for a crucial meeting of the Board of Directors to discuss the proposed dividend pay-out to the company's shareholders following the completion of a US$1.725 billion sale of its specialty division Agila Specialties to a U.S.-based pharmaceutical company, Mylan Inc.1Kumar proposed that Strides distribute all the free cash available from the sale after settling their debts and making employee as well as additional pay-outs, in the form of dividends to its shareholders.

Strides had already communicated its decision to settle debts and reduce its financial leverage.2In 2013, the dividend rates among Strides' top 10 peers in the Indian pharmaceutical sector were very high, ranging from Cipla's 100 per cent to Divis Labs' 750 per cent.3Yet the proposed dividend pay-out, based on a residual dividend pay-out policy, was a bold and unconventional move. It would be a drastic change from Strides' previous dividend pay-outs, which had not surpassed 21 per cent. In fact, if passed by the Board, the dividend pay-out of $650-700 million amounting to a 5,050 per cent dividend rate and a dividend pay-out ratio (dividend/earnings) of close to 85 per cent would be one of the largest dividend pay-outs in the history of all Indian corporations.

What signal would the high dividends send and how would this affect Strides'clientele? Would the market reward a high dividend pay-out with high share prices? What would be the opportunity cost of low debts and a high dividend pay-out? Would it jeopardize the financing of the company's future growth plans? Would the board

support the dividend pay-out decision, or would it suggest other means of returning cash to the shareholders?4

Kumar knew that convincing the Board to move forward with the dividend pay-out would be difficult. Yet, he believed that this was a strong strategic move, and that the company would benefit significantly through creating value for its shareholders.

BACKGROUND OF THE INDIAN PHARMACEUTICAL INDUSTRY

The Indian pharmaceutical industry5was the third largest global player in terms of volume and tenth largest in terms of value in 2013.6The industry was estimated to be worth $34 billion (including exports) in 2013- 2014, with the domestic formulations market constituting about 1.1 per cent of the global pharmaceutical market in terms of value. The exports of the Indian pharmaceutical industry grew at a compound annual

growth rate (CAGR) of 26.1 per cent during the period of 2005-2006 to 2013-2014 to reach $10.1 billion in 2012-2013. From April 2013 to December 2013, the sector had accounted for $8 billion worth of exports.

In 2013, the Indian pharmaceutical market was highly fragmented, comprising about 24,000 players and more than a million drugs across various therapeutic categories produced every year in India. Yet, with about 330 players in the organized sector, and the top 10 formulation companies accounting for 42.2 per cent of the formulation sales, the industry attracted several multinational pharmaceutical companies.

In 2013, a number of factors led to a decline in the Indian pharmaceutical industry growth rate to 9.8 per cent from 16.6 per cent in 2012. However, the slowdown was more prominent in the case of the multinationals than in Indian companies. Thus the top 10 multinational companies experienced a decline in the growth rate from 16 per cent to 8 per cent over 2012-2013 to 2013-2014. Indian companies, on the other hand, experienced a deceleration in the growth rate, from 18 percent in 2012-2013 to 13 percent in 2013-2014.

Opportunities

Strong opportunities existed for cost-competitive Indian pharmaceutical companies, especially after 2011, due to the presence of 'patent cliffs' in international pharmaceutical markets. Patent cliffs referred to the situation faced by several top pharmaceutical companies, including Pfizer (for Lipitor), Novartis (for Diovan), Merck (for Singulair), Bristol Myers Squibb and Sanofi-Aventis (for Plavix) arising from the expiration of the patents they held for several of their important prescription drugs (so-called "blockbuster drugs"). Such patent expirations led to the mass production of generic versions of these by small

pharmaceutical laboratories, which in turn led to revenue losses for major pharmaceutical companies.

For example, Ranbaxy a generic drug manufacturer was an Indian company that benefitted from such a patent cliff and achieved an initial breakthrough in the United States market when Pfizer faced a loss of exclusivity for its blockbuster drug Lipitor in 2011. Owing to patent expiration, Pfizer entered into a licensing agreement with Ranbaxy that provided Ranbaxy with the exclusive rights to produce atorvastatin (Lipitor) for 180 days.

The number of Indian companies that filed patent challenges in the United States against various global generic pharmaceutical companies called "Para IV filings"7 had increased since 2011. Ranbaxy, Sun Pharma, Dr. Reddy's, Lupin, Alembic Pharma, Claris Lifescience and Torrent Pharmaceutical have all submitted Para IV filings since 2011. Furthermore, Ranbaxy and Dr. Reddy's earned 56 per cent and 20 per cent of their total revenues in 2011-2012 from Para IV filings.

In addition to the opportunities offered by expiring blockbuster drug patents and Para IV filings, Indian generic drug producers were drawn into lucrative niche segments such as the injectable drug markets. The overall size of the injectable drug market had increased from $200 billion during 2009 to $220 billion in 2011, with generic drug penetration being 15 per cent. The United States accounted for the largest share of the overall injectable drug market.

Challenges

The National Pharmaceutical Pricing Policy (NPPP) adopted by the Indian Government in 2012 was one of the main factors affecting the industry growth rate. All drug prices were brought under the purview of this government policy. As such, price controls were imposed. This affected margins and thus industry

growth.The Indian government effectively enhanced the scope of the Drugs Price Control Order through the NPPP to bring within the scope of the National List of Effective Medicines (and hence price controls) almost all available drugs, including combination drugs. The implementation of the NPPP had led to an erosion of retail and distributor margins from 20 and 10 per cent to 16 and 8 per

cent, respectively. Faced with decreases in margins and lower profits, many distributors were uncertain about the feasibility of staying in business.

The industry faced regulations not only in the domestic but also in the foreign markets, especially in the United States. The Indian pharmaceutical industry's key strengths lay in its cost-competitiveness and advanced process chemistry skills which made it possible for Indian companies to produce generics without licensing from the original patent-holders. As such, exports, especially to the United States and Europe (who have high health expenditures) contributed to a large part of the industry's revenues.10However, for sustained growth, the industry would need to comply with strict manufacturing and quality practices that fell in line with United States Food and Drug Administration (FDA) norms which governed the most lucrative market.

There were other factors in the domestic macroeconomic environment that posed challenges to domestic pharmaceutical industry players. The domestic inflation rate as measured by the consumer price index (CPI) combined had remained high at 10.2 per cent in 2012-2013, followed by 9.5 per cent in 2013- 2014.11The central bank the Reserve Bank of India had followed a tight monetary policy to contain such inflation and had raised the operational policy rate the repo rate by 525 basis points during March 2010 to October 2011.12In May 2013, when fears of "tapering"13by the United States caused high capital outflows and a severe pressure on the exchange rates with the rupee depreciating, the Reserve Bank of India resorted to exceptional measures to further tighten monetary policy and curtail liquidity available in the system. Consequently, the lending rates remained high and industrial credit off-take moderated. The Index of Industrial Production an index measuring industrial growth across its manufacturing, mining and electricity sectors consequently declined from 8.2 percent growth rate in 2010-2011 to 1.1 percent in 2012-2013 (see Exhibit 1).

Further environmental challenges existed in the form of the increasing difficulty of acquiring lands for projects, as well as obtaining environmental clearances. A recent report on the ease of doing business

in India stated that India was 132nd among 185 economies.14

The Indian pharmaceutical sector had seen their debts mount and revenues fall. The aggregate debt of the domestic drug and pharmaceutical sector in India increased from $4.02 billion in 2010-2011 to $4.4 billion in 2013-2014, and a three-year CAGR of 13.4 per cent.15Non-conducive equity markets made funding more difficult. Moreover, with international credit rating agencies, Standard & Poor and Fitch, downgrading India sovereign ratings to a negative in 2012, the External Commercial Borrowings route was also difficult for many companies. In December 2012, for instance, Ranbaxy's debt-equity ratio

was 2.48, which would increase more than twice by 2015.16

History

Arun Kumar17founded Strides a first generation pharmaceutical company in 1990 in Vashi, New Bombay.18Kumar recalled his early days in the mid-1980s at the Bombay Drug House, one of the first Indian companies to export finished products, as well as his stint as a "buying agent" for European companies. He had believed in following certain guiding principles in his business namely, focusing on exports, forging partnerships and concentrating on building scale-to-sell.

Within two years of its establishment, Strides had started exporting pharmaceutical products to Nigeria. In 1994, the company received venture capital funding from Schroder Capital Partners, which became a large stakeholder in Strides with a nearly 37 per cent stake. Arcolab a Swiss customer of Strides provided Strides with a capital funding of $2 million in 1992, which proved to be an important milestone in the evolution of Strides. In exchange, Strides changed its name to Strides Arcolab Limited in 1996.

The early history of Strides, like that of most first-generation companies, was one of attention to critical size and scale. "There was very little emphasis on strategy in the early phases of growth. Size was critical, since we needed bankers to lend and customers to buy."19Strides entered foreign markets aggressively and also acquired both domestic and foreign companies during the period between 1990 and 2007 (see Exhibit 2). The company also became a listed company in this initial period, it was listed with the National Stock Exchange in 2000 and with the Bombay Stock Exchange in 2002.

In the mid-2000s, Kumar started investing in research and development (R&D), in order to transform Strides Arcolab Ltd. into a specialized pharmaceutical company. By 2008, he was convinced that in the $900 billion pharmaceutical industry into which Strides was a late entrant the key to success lay not in achieving critical size, but focusing on value. The $5 billion generic injectable drug segment was a small but profitable niche within the global pharmaceutical industry. The high capital expenditure and long gestation lags meant that this segment had very few players. The segment "represented a scarcity domain," said Kumar, one which he felt the need to tap into.

In 2010, with large, established U.S. players facing regulatory issues and a shortage of global players, prices in the injectable drug market increased drastically, by as much as 150 times in certain cases.20 Kumar saw an opportunity in this, since Strides did not face compliance issues at this stage. He established manufacturing facilities in nine locations across India, Brazil and Poland and invested in R&D to create portfolio of products.

Strides and the Injectable Drug Market

In 2009, the injectable drug market was worth $200 billion, and grew by 10 per cent to $220 billion in 2011. The market for generic injectable drugs was more lucrative than the branded injectable drug market, and within this sector, the segments of biologics and oncological agents were relatively more lucrative. At 38 per cent, the United States accounted for the largest chunk of the overall global injectable drug market in 2011. It was estimated that the U.S. generic injectable sales would grow at a

CAGR of 10 per cent between 2012 and 2015.21

However, strict compliance norms meant that the number of global injectable manufacturing facilities were limited. In 2010-2011 the United States witnessed a considerable shortage of injectable drugs. The number of injectable drugs on the shortage list increased from 39 to 139 in 2011.22Such shortages were exacerbated by the long lead-time required to manufacture those injectable drugs, as well as a very low rate of approval for generic alternatives that could have made up for the shortage.

A large part of the injectable drug market faced limited competition, with more than 86 per cent of the products having less than five players. The injectable drug market was a niche market that was subject to higher compliance standards. This contributed to the presence of fewer players and high value products both factors contributed to higher margins. Realizing this, Kumar decided to restructure the company into a pharmaceutical division as well as a specialty division for Injectable drugs Agila as a subsidiary of Strides Arcolab Ltd. With this move he had found both niche and scarcity value in the injectable drug market. The injectable drug market had "scarcity" partly because making injectable drugs was more difficult than making tablets. Furthermore, since the product was targeted more at hospitals than individuals, there were fewer customers. Thus, upon the expiration of patents, prices for generic versions of the products did not fall drastically.

In 2010, the specialty subsidiary was rebranded "Agila Specialties Limited." Kumar raised $200 million in the first four years after establishing Agila in the specialty space.23He remembered that there was foreign institutional investor (FII) interest in Strides due to its move into the injectable drug market, and that such an FII investment had accounted for 53 per cent of the investment in 2010. In December 2012, FIIs, the Indian public, trusts and foreign nationals accounted for more than 50 per cent of the total shareholding (see Exhibit 3). In 2012, Strides had three business divisions: pharmaceuticals, specialties Agila and biotechnology, which when combined had a global turnover of $435 million, 14 manufacturing facilities across six countries and a country presence across over 75 emerging and

developed markets. External markets accounted for about 95 per cent of its revenues (see Exhibit 4).

STRIDES AND THE AGILA SALE

The Strides growth story, especially after 2008, was one of not only identifying the right niche area, but also of creating value and more importantly exiting this niche at the right time and at the right price. In 2008 Strides had acquired a controlling stake in Ascent PharmaHealth an Australian securities exchange listed company and a major generics player in Australia with an investment of $75 million. In January 2012, Strides sold its 94 per cent stake in Ascent to Watson Pharmaceuticals for $393 million. Strides used this to enhance its focus on the high-growth of Agila by infusing

additional capital, as well as reducing its debts to improve its capital structure.24

With U.S. patents facing expirations in 2012, large drug-makers were seeking acquisitions to offset a potential decline in revenues. For instance, the world's largest drug maker Pfizer Inc. was expected to lose as much as $2.75 billion in sales in 2013 as a result of patent expiry.25Kumar began planning to sell Agila in 2012. Agila, which made cancer treatments and antibiotics, accounted for 74 per cent of Strides' earnings before interest, tax, deductions and amortizations (EBITDA) between January and September 2012. In the same period, Agila's sales jumped from $162.39 million to $183 million a year. Consequently, the company's profits were expected to quadruple to $169.09 million in 2013. Companies who expressed interest in purchasing Agila Specialties included Pfizer Inc., Pennsylvania- based Mylan Inc., Swiss drug maker Novartis Ltd. and German-based Fresenius SE.

In February 2013, Strides sold Agila Specialties Private Ltd. and Agila Specialties Asia Pte Ltd., Singapore, to Mylan Inc. The deal was worth $1.6 billion, with an additional consideration of $250 million. The latter was contingent upon the satisfaction of certain regulatory conditions related to the injectable drug manufacturing facilities in India, following a warning letter that Strides had received from the U.S. FDA regarding one of its units in Bengaluru.

The deal was valued at 18.7 times Agila's EBITDA for 2012. In fact, the deal size was more than the market value of Strides and also higher than Mylan's $1.3 billion revenue from the Asia-Pacific region. "The investor community was being guided to consider $1.725 billion as the potential final payment," said Kumar. The deal was important for Mylan since Agila brought with itself a broad product portfolio

of more than 300 filings approved globally and marketed through a network covering 70 countries, including 61 Abbreviated New Drug Applications (ANDAs)26approved by the FDA.

Kumar was aware of the skepticism with the Agila sale and his decision to expand the biologics business. He knew that investors would perceive a void in the parent company after the Agila sale, since the latter contributed to 60 per cent of sales and 82 per cent of Strides' EBITDA.27Following the sale, Strides was left with only their biologics and oral pharmaceutical products. However, the company received no revenues from the

biologics business in 2013, while its revenue from the oral products in 2013 was less than $183.82 million.

And what of the opinion that Strides had completed the Agila deal in a hurry? With an acute global shortage of injectable drugs due to the regulatory hurdles faced by big names like Hospira, Teva and Sandoz, could Strides have received a little more money if it had waited? Kumar was aware that in May 2009, Novartis had acquired the injectable drug unit of Austria-based Ebewe Pharma in a $1.2 billion purchase- about 4.7 times sales.28Mylan itself had acquired the injectable drug business of Bioniche Pharma Holdings Ltd. for $550 million in 2010, paying about 4.2 times annual revenue. Further, in 2010, Abbott Laboratories had announced the acquisition of Mumbai-based Piramal Healthcare Ltd.'s branded generic-medicine unit for $3.72 billion, paying about 8.7 times total sales. The deal was worth more than Piramal's $2.5 billion market value at the time.

However, Kumar was convinced that it was the right time for the sale of Agila, and a move to the

biotech generics business:

From a timing perspective it was a compelling reason for us to close the deal now, simply because of the scarcity of assets. We believe that there are new investments that have been made by companies that have been impacted by the regulatory fall-outs, although these assets will take two to three years. The scarcity asset value may not be same in three to four years. The patent cycle offers us an opportunity . . . there is a huge portfolio of products going off the patent cliff in the injectable space. With an industry-leading pipeline, we fit that bill very well.

He was confident that with the acquired start-up Inbiopro solutions (to be renamed Strides Biotech) (see Exhibit 2) and the legacy business of Strides itself, they could achieve the revenue levels prior to the Agila sale within three years in the biologics business. Biologics or biopharmaceuticals represented the cutting-edge of bio-medical research and the next new frontier in medicine. Based on naturally occurring proteins and produced using living cells, they were different from the chemically-synthesized small molecule medicines that still represented a majority of synthetic medicines.

With biologics providing major solutions to certain life threatening conditions, such as cancer and rheumatoid arthritis, their global market was growing twice as fast as that for small molecule medicines. In fact, biologics represented the fastest growing market segment in the pharmaceutical industry, with seven of the top 10 pharmaceutical companies worldwide expected to be focused on biologics by 2017 and 30 per cent of the pharmaceutical industry consisting of biologics (see Exhibit 5).29Furthermore, with $79 billion worth of originator sales going off-patent by 2018 as compared to a much lower $21 billion worth of injectable drug sales the market size predictions for biologics for 2020 ranged

from $2 billion to $20 billion (see Exhibit 6).30

Unlike conventional drugs, the production of biologics was more difficult, requiring state-of-art manufacturing techniques with high quality standards because biologics were heat-sensitive and susceptible to microbial contamination. In Kumar's opinion, biologics constituted a new niche market with less competition and higher margins.

Kumar planned to develop Strides' pharma-biotech business and front-end businesses in India and Africa as fully-funded businesses with the Mylan cash deal. This involved investments in a next- generation biologics facility in Johor, Malaysia, as well as a 15,000 square foot advanced R&D facility

in Bengaluru.31He had studied the company's latest financial statements (December 2012) and was prepared for the questions that the Board would pose (see Ivey Publishing product 7B15N011). In particular, he was prepared to answer questions related to the amount of free cash flows available to be

paid out as dividends.32

THE CASH DEAL, CAPITAL STRUCTURE AND DIVIDEND PAYOUT

Strides had already announced its goal of reducing its leverage and using the proceeds from the Mylan deal to resolve its debts.33In a move towards reducing leverage, the company had already redeemed Foreign Currency Convertible Bonds34when they divested Ascent in 2012. Net debt was consequently reduced from $591.61 billion in January 2012 to $298.62 billion on December 31, 2013. As a result, its debt to EBITDA had improved from 5.76x to 2.53x and EBITDA to interest cover had improved from 2.72 to 3.45.

With divestment of Agila, the company planned to further build on its pharmaceutical business and also to move into the biologics space. The pharmaceutical business, however, was different than the injectable drug

business:

[The pharmaceuticals] business has grown from single digit EBITDA in 2011 to 13 per cent EBITDA in 2012 and we now have 20 per cent guidance in 2013. So at $33.06 million of EBITDA, the pharmaceutical business will be relatively low in debt, no CAPEX, almost negligible depreciation, which effectively means EBITDA to profit-after-taxes (PAT) conversion is almost in the high 90s, delivering a very solid earnings per share to stakeholders

and therefore that business becomes an important [one] going forward.35

How would a change in the company's capital structure affect the various stakeholders specifically

ratings agencies, analysts, bondholders, managers and stockholders?

The Indian stock market had not been one with a history of impressive dividend pay-outs. A study of more than 6,000 Indian stocks had reported that only six of these companies had "paid dividends of more than 30 per cent of their net profit in the past decade, as well as outperformed the benchmark (Bombay Stock Exchange BSE Sensex) index36for eight of those 10 years."37These six companies which had high dividend pay-out ratios of between 30 to 78 per cent were all high-growth companies (see Exhibit 7). The study also pointed out that such dividend-rich companies were a huge draw with investors. Companies that had paid over 30 per cent dividends accounted for 41 per cent of the market

capitalisation in financial year 2011-2012 compared with 27 per cent in 2008-2009.38

Exhibit 8 depicts the dividend pay-out and stock price histories for Strides. The earnings per share of Strides especially in the post-crisis period had been high and significantly above the dividend per share. The 2012 divestment of Ascent had raised the earnings per share substantially by 273 per cent from INR38.65 in 2011 to 144.30 in 2012.39Strides stock prices had risen continuously from 81.9 on March 31, 2009 to 871.75 on March 31, 2013.

Kumar had three options:

1. A Zero Dividend Pay-Out: Kumar was aware that a zero dividend pay-out was an option, even

when the company had posted substantial net income owing to the sale. Given the risks associated with funding in the context of a slowing global economy and the huge opportunities that the biologics space posed, he knew that some among his Board would prefer reinvesting the surplus income rather than paying dividends. This would also be in line with Strides image of a company looking to grow aggressively.

2. A 15-20 per cent Dividend Pay-Out: This would fall within a conservative policy which would be

in line with Strides' past dividend pay-outs. At the same time, it would not raise the expectations of investors for high dividends in the future. Again, the available free cash could be used not just to retire debt, but also for future expansion plans.

3. Residual Dividend Pay-Out Policy: Kumar held the view that the free cash available after the

retirement of debt and employee and minority pay-outs should be completely distributed to the shareholders. He believed that investments in Strides were largely on account of Strides' move into the injectable market. Now that Strides had moved away from injectable drug market into the biologics market he felt he had a fiduciary responsibility to reward the investors.

"The money from version one of Strides cannot be used to fund version two," he thought to himself. A residual dividend pay-out would help Strides earn their investors' trust. More importantly, it would be a win-win situation if investors used the cash available through such pay-outs to reinvest in the biologics market with Strides. However, was such a dividend pay-out policy without its ill effects? How would

investors view such a high dividend pay-out?

An important view that influenced the dividend pay-out policies of firms was the Modigliani-Miller Theorem on capital structure irrelevance. According to this view, what a firm paid out as dividends was irrelevant and stockholders were indifferent about receiving dividends. Further, this view held that neither the price of a firm's stock, nor its cost of capital, were affected by its dividend policy. There were also the two contrary viewpoints regarding investor preferences, namely the "Tax Preference Theory" and the "Bird-in-Hand Fallacy." The former held that investors preferred low dividend pay-

outs. According to the latter, investors preferred high pay-outs.40

There were other reasons why firms continued to pay dividends, such as the clientele and signalling effects. The "dividend clientele effect" referred to the tendency of investors to buy stocks in firms that had dividend policies that matched their preferences for high, low or no dividends. Furthermore, dividend pay-outs also had signalling effects any dividend changes tended to signal information to financial markets. Increasing dividends, for instance, demonstrated a firm's commitment to pay dividends in the long-term and in turn, its belief that it has the capacity to generate these cash flows. Such increases acted as positive signals and led to increases in stock prices. Conversely, decreasing dividends acted as a negative signal, with markets reading it as an indication that these firms were in substantial and long-term financial trouble. This would lead to a drop in stock prices. On the other hand, markets may very well interpret higher dividends as a signal that a firm had neither plentiful nor lucrative projects as it had earlier, and hence had only lower growth prospects in the future.

Kumar envisaged a growth capital requirement not exceeding $100 million for the new biologics market that Strides wished to move into after the Agila sale. He had started Strides with an investment of 0.5 million in 1990. There was no reason why the biotech business could not follow the Agila model of a growth phase, an investment phase and finally a discovery of value phase.

Kumar predicted that the pharmaceutical business being relatively debt-free would return an EBITDA- to-PAT conversion in the 90s. He wished to use 100 per cent of the free cash in the form of employee pay-outs, minority pay-outs, transaction costs, and debt retirement, and in the form of dividends. Of this, Strides would spend $250 million in retiring debt, $50-55 million on employee pay-outs (typically 5 per cent of the equity value), and about $100 million on minority pay-outs to minority partners in Brazil, Canada and Australia. He estimated taxes to be in the range of $275-300 million of the transaction. Based on these estimates, as also his belief that the company owed a fiduciary responsibility to reward its shareholders, Kumar proposed a distribution of $650-700 million of the pre-tax proceeds from the sale to Strides' shareholders.

However, what form should the distribution take? Should it be in the form of a share buy-back or a dividend pay-out? Kumar personally preferred a dividend pay-out in the form of a special dividend. He felt that happy shareholders would make for a happy company, which in turn would mean happy

employees. However, the company had not paid a dividend of more than 21 per cent on its stocks in the past. What would be the impact of the 5,050 per cent dividend that he was proposing? What would be

the signalling and clientele effects of such high dividends?

As Kumar walked towards the boardroom, he wondered how the Board would react to his proposal. How would the various stakeholders react? And what of the markets? Would the markets reward him

for the lower debt and high dividends?

QUESTIONS

1. Should the proposed high dividend payout in form of regular dividend or special dividend?Why?

2.What are the strategic considerations of this dividend decision (Investment Opportunities, Stability in Earnings, Alternative Sources of Capital, Degree of Financial Leverage,Signaling Incentives,Stockholder Characteristics,etc)?

3.How would investors react to the increased dividends of Strides? (tip:discuss the effects on signaling and clientele associated with dividend payouts.)?

4.What are the cons and pros of the three options for Strides: (1) zero payout (2) 15-20 per cent payout(3) a residual payout?