Figure 1 Selected financial data, Penny Corporation (in millions, except por sharo data) 2000 2010 2011 2012 2013 2014 2015 330.019.8 $ 1612 $35,082.0 $ 1,3422 $38,828,0 $40,716.3 $ 1.464.8 $ 1.3033 $ 16.75 216 $ 630.8 $630,0 $ 0073 1428 301.8 3631 $14,2015 $ 1,3513 $ 10.8 $ 648,3 $ 680,2 3780 $48,000.0 $ 1,700.0 5 226 $ 7254 50520 370 $ $ 470.3 3840 3514 $ 5370 $ 805.2 3546 Sales $27.357.4 Not Income $ 600.1 Amount to preferred dividendo mount to common dividende $ 420.1 Amount to retained earnings $ 221.0 Common shares outstanding 3479 Earrings per show on average Comin) $ 1.96 OPS (on average common shares). 5 1.30 Payout ratio (OPSEPSY 094% Total retained emings $ 7,0412 Cash bnance $ 1707 "OPS (dividends per shary EPS (aming per share) 5 2:40 $ 1.30 55.3% $ 7,426.1 5.1.3076 $ 3.00 $ 140 30.0% $ 8,2313 5 11025 $ 4.00 5 3.00 5 1.703 1.78 41.6% 48,0% 5 0,0380 $9,0814 5.170505 2,3572 5 3.65 $ 1.70 48.2 $10,387.6 52,984.4 5 4.51 $ 1.00 43.8% $11,319.0 $32350 Figure 2 Selected financial data, other retail chains 2009 2010 2011 2012 2013 2014 2015 $1.82 $0.09 5.0% $2.29 $0.10 4.4% $2.35 $0.12 5.1% $2.50 $0.13 5.2% $1.10 $0.17 15.5% $0.95 $0.20 21.1% $0.23 $0.20 87.0% $0.30 $0.20 66.7% $0.51 $0.08 15.7% $0.80 $0.11 13.8% $1.21 $0.16 13.2% $1.40 $0.24 17.1% Dillard Department Store: EPS $0.69 $0.93 $1.38 DPS $0.05 $0.05 $0.08 Payout ratio 7.3% 5.4% 5.8% Dollar General EPS $0.38 $0.61 $0.81 DPS $0.09 $0.11 $0.13 Payout ratio 23.7% 18.0% 16.1% Limited, Inc.: EPS $0.10 $0.19 $0.37 DPS $0.01 $0.02 $0.04 Payout ratio 10.0% 10.5% 10.8% Nordstrom, Inc.: EPS $0.35 $0.38 $0.54 DPS $0.06 $0.06 $0.07 Payout ratio 17.1% 15.8% 13.0% J.C. Penney: EPS $2.75 $2.94 $3.13 DPS $0.92 $1.00 $1.08 Payout ratio 33.5% 34.0% 34.5% Wal-Mart Stores: EPS $0.16 $0.23 $0.35 $0.02 DPS $0.02 $0.04 Payout ratio 125% 8.7% 11.4% Note: DPS refers to dividends per share, EPS to earings per share $0.55 $0.10 $0.66 $0.11 16.7% $0.91 $0.13 $1.10 $0.18 16.4% 18.2% 14.3% $2.91 $1.18 40.6% $2.66 $1.18 44.4% $3.53 $1.24 35.1% $4.70 $1.48 31.5% $0.48 SO 05 10.4% $0.58 $0.07 12.1% $0.80 $0.09 11.3% $110 $0.12 10.9% Mr. Clarence Autry, who was also on the board of directors of the Exxon corporation and no stranger to the world of corporate finance, broke in "Young man," he said dryly. "your proposal ignores reality. It's not whether the stockholders are theoretically better off that counts, it's what they want. You cannot tell the stockholders you're doing what's best for them by cutting the dividend; the dividend is what they want. Not only is that dividend sure money in their pockets now, but the fact that it's the same size as last time, or even higher, is a signal to them that their company is doing well and will continue to do so in the future. These decisions can't always be made on the basis of good-looking formulas from the back room, you know Ms. Barbara Reynolds, who was the head of directors' auditing committee, and somewhat of an accounting expert, agreed with Mr. Autry. "That's a good point, Clarence, and one that's well recognized by our competitors, too. If you check, 1 don't think you'll find a single one of them that's cut their dividend in the last six a 2. Refer to Figure 2. What type of dividend policies would you say are being practiced by Penny's competitors in the retailing industry? 3 What kind of signal a change to residual dividend policy will send to the shareholders and the investment community? 4. How does the residual dividend policy support Modigliani and Miller's (MM) theory about dividend policy in a world with no taxes? 5. Do you go along with Clarence Autry's comment that it's what the stockholders want that counts, not their total rate of return? Why or why not? 6. Barbara Reynolds suggests that, if cash is needed for the capital budget, a stock dividend could be substituted for the cash dividend. Do you agree? How do you think the stockholders would react? Regardless of their reaction, is the stock dividend an equivalent substitute for the cash dividend? 7. After all is said and done, do you think the firm's dividend policy matters? If what do you think Penny's policy should be? so, Additional Question #8. Assume that Penny Corporation is a cash-only company. The company is now considering switching to a 30-day credit policy with no discounts. What factors should the firm consider before making the switch? Discuss. Figure 1 Selected financial data, Penny Corporation (in millions, except por sharo data) 2000 2010 2011 2012 2013 2014 2015 330.019.8 $ 1612 $35,082.0 $ 1,3422 $38,828,0 $40,716.3 $ 1.464.8 $ 1.3033 $ 16.75 216 $ 630.8 $630,0 $ 0073 1428 301.8 3631 $14,2015 $ 1,3513 $ 10.8 $ 648,3 $ 680,2 3780 $48,000.0 $ 1,700.0 5 226 $ 7254 50520 370 $ $ 470.3 3840 3514 $ 5370 $ 805.2 3546 Sales $27.357.4 Not Income $ 600.1 Amount to preferred dividendo mount to common dividende $ 420.1 Amount to retained earnings $ 221.0 Common shares outstanding 3479 Earrings per show on average Comin) $ 1.96 OPS (on average common shares). 5 1.30 Payout ratio (OPSEPSY 094% Total retained emings $ 7,0412 Cash bnance $ 1707 "OPS (dividends per shary EPS (aming per share) 5 2:40 $ 1.30 55.3% $ 7,426.1 5.1.3076 $ 3.00 $ 140 30.0% $ 8,2313 5 11025 $ 4.00 5 3.00 5 1.703 1.78 41.6% 48,0% 5 0,0380 $9,0814 5.170505 2,3572 5 3.65 $ 1.70 48.2 $10,387.6 52,984.4 5 4.51 $ 1.00 43.8% $11,319.0 $32350 Figure 2 Selected financial data, other retail chains 2009 2010 2011 2012 2013 2014 2015 $1.82 $0.09 5.0% $2.29 $0.10 4.4% $2.35 $0.12 5.1% $2.50 $0.13 5.2% $1.10 $0.17 15.5% $0.95 $0.20 21.1% $0.23 $0.20 87.0% $0.30 $0.20 66.7% $0.51 $0.08 15.7% $0.80 $0.11 13.8% $1.21 $0.16 13.2% $1.40 $0.24 17.1% Dillard Department Store: EPS $0.69 $0.93 $1.38 DPS $0.05 $0.05 $0.08 Payout ratio 7.3% 5.4% 5.8% Dollar General EPS $0.38 $0.61 $0.81 DPS $0.09 $0.11 $0.13 Payout ratio 23.7% 18.0% 16.1% Limited, Inc.: EPS $0.10 $0.19 $0.37 DPS $0.01 $0.02 $0.04 Payout ratio 10.0% 10.5% 10.8% Nordstrom, Inc.: EPS $0.35 $0.38 $0.54 DPS $0.06 $0.06 $0.07 Payout ratio 17.1% 15.8% 13.0% J.C. Penney: EPS $2.75 $2.94 $3.13 DPS $0.92 $1.00 $1.08 Payout ratio 33.5% 34.0% 34.5% Wal-Mart Stores: EPS $0.16 $0.23 $0.35 $0.02 DPS $0.02 $0.04 Payout ratio 125% 8.7% 11.4% Note: DPS refers to dividends per share, EPS to earings per share $0.55 $0.10 $0.66 $0.11 16.7% $0.91 $0.13 $1.10 $0.18 16.4% 18.2% 14.3% $2.91 $1.18 40.6% $2.66 $1.18 44.4% $3.53 $1.24 35.1% $4.70 $1.48 31.5% $0.48 SO 05 10.4% $0.58 $0.07 12.1% $0.80 $0.09 11.3% $110 $0.12 10.9% Mr. Clarence Autry, who was also on the board of directors of the Exxon corporation and no stranger to the world of corporate finance, broke in "Young man," he said dryly. "your proposal ignores reality. It's not whether the stockholders are theoretically better off that counts, it's what they want. You cannot tell the stockholders you're doing what's best for them by cutting the dividend; the dividend is what they want. Not only is that dividend sure money in their pockets now, but the fact that it's the same size as last time, or even higher, is a signal to them that their company is doing well and will continue to do so in the future. These decisions can't always be made on the basis of good-looking formulas from the back room, you know Ms. Barbara Reynolds, who was the head of directors' auditing committee, and somewhat of an accounting expert, agreed with Mr. Autry. "That's a good point, Clarence, and one that's well recognized by our competitors, too. If you check, 1 don't think you'll find a single one of them that's cut their dividend in the last six a 2. Refer to Figure 2. What type of dividend policies would you say are being practiced by Penny's competitors in the retailing industry? 3 What kind of signal a change to residual dividend policy will send to the shareholders and the investment community? 4. How does the residual dividend policy support Modigliani and Miller's (MM) theory about dividend policy in a world with no taxes? 5. Do you go along with Clarence Autry's comment that it's what the stockholders want that counts, not their total rate of return? Why or why not? 6. Barbara Reynolds suggests that, if cash is needed for the capital budget, a stock dividend could be substituted for the cash dividend. Do you agree? How do you think the stockholders would react? Regardless of their reaction, is the stock dividend an equivalent substitute for the cash dividend? 7. After all is said and done, do you think the firm's dividend policy matters? If what do you think Penny's policy should be? so, Additional Question #8. Assume that Penny Corporation is a cash-only company. The company is now considering switching to a 30-day credit policy with no discounts. What factors should the firm consider before making the switch? Discuss