The senior management of Rodart Corporation Ltd. has just returned from a series of meetings with the in- vestment dealers who cover the industry for the investing public. The analysts expressed concern about the lack of growth in Rodart's dividend even though the company's profits have been steadily increasing. The company's capital budget will require it to raise funds next year and management is concerned that a poor review from the investment analysts will make it more difficult to raise money in the stock market.
Management is considering the following alternatives:
1. Issue new shares (preferred or common).
2. Increase Rodart's dividend above the industry average, in the hope that the market will respond to the improved dividend yield by increasing the market price of the shares.
Instructions
After the class has been divided into groups and your group has been assigned one of the two alternatives for analysis, do the following:
(a) Identify the risks and benefits of the alternative. Identify the measurements (ratios, share prices, and soon) that will be used to determine the success or failure of your option if it is implemented.