Central Canada Steel (CCS) was formed 5 years ago to exploit a new continuous- casting process. SSC's founders, Donald Brown and Margo LaPointe, had been employed in the research department of a major integrated-steel company, but when that company decided against using the new process, they decided to strike out on their own. One advantage of the new process was that it required relatively little capital in comparison with the typical steel company, so Brown and Lapointe have been able to avoid issuing new stock, and thus they own all of the shares. However, SSC has now reached the stage where outside equity capital is necessary if the firm is to achieve its growth targets yet still maintain its target capital structure of 60 percent equity and 40 percent debt. Therefore, Brown and Lapointe have decided to take the company public. Until now, Brown and Lapointe have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Assume that you were recently hired by Pierce Westerfield Carney (PWC), a national consulting firm, which has been asked to help SSC prepare for its public offering, Martha Millon, the senior PWC Consultant in your group, has asked you to make a presentation to Brown and Lapointe in which you review the theory of dividend policy. a (1) What is meant by the term "distribution policy? (2) The terms "irrelevance," "bird-in-the-hadn," and "tax preference" have been used to describe 3 major theories regarding the way dividen payouts affect a firm's value Explain what these terms mean and briefly describe each theory (3) What do the 3 theories indicate regarding the actions management should take with respect to dividend payout? b. What is stock repurchases? discuss the advantages and disadvantages of a firm repurchasing its own shares c. What is a dividend reinvestment plan, and how does it work? Activate Windows Go to Central Canada Steel (CCS) was formed 5 years ago to exploit a new continuous- casting process. SSC's founders, Donald Brown and Margo LaPointe, had been employed in the research department of a major integrated-steel company, but when that company decided against using the new process, they decided to strike out on their own. One advantage of the new process was that it required relatively little capital in comparison with the typical steel company, so Brown and Lapointe have been able to avoid issuing new stock, and thus they own all of the shares. However, SSC has now reached the stage where outside equity capital is necessary if the firm is to achieve its growth targets yet still maintain its target capital structure of 60 percent equity and 40 percent debt. Therefore, Brown and Lapointe have decided to take the company public. Until now, Brown and Lapointe have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Assume that you were recently hired by Pierce Westerfield Carney (PWC), a national consulting firm, which has been asked to help SSC prepare for its public offering, Martha Millon, the senior PWC Consultant in your group, has asked you to make a presentation to Brown and Lapointe in which you review the theory of dividend policy. a (1) What is meant by the term "distribution policy? (2) The terms "irrelevance," "bird-in-the-hadn," and "tax preference" have been used to describe 3 major theories regarding the way dividen payouts affect a firm's value Explain what these terms mean and briefly describe each theory (3) What do the 3 theories indicate regarding the actions management should take with respect to dividend payout? b. What is stock repurchases? discuss the advantages and disadvantages of a firm repurchasing its own shares c. What is a dividend reinvestment plan, and how does it work? Activate Windows Go to
