You are CFO for your company and you have been given the task of financial planning for a new product to increase corporate earnings per share.
Goal is to maximize shareholder wealth of your product.
Use equity and debt financing to obtain $10,000,000 of budgeted funds for development of the product.
1) Create a cash flow statement with operating activities, investing activities, and financing activities for five years. The cash flow statement should have at least 5 lines or accounts. You are not working from a time line which would show only net cash flow. Compute the net present value and rate of return for your product. What is your cost of capital.
3) What leverage calculations are important to show the level of risks you are willing to assume for your company and why?
Will you pay dividends? If yes, when? Why or why not?
4) What brief presentation could you summarize for a press release?
Basic concepts relating to the dividend:
Firm's Ability to Pay Dividend depends on its funds requirements for growth, shareholders' desire and liquidity. A growth firm should set its dividend rate at a low level (because of its high needs for funds) and move towards its target slowly.
The advantages of the paying dividend are:
1. The investors prefer current income as future is uncertain. Thus payment of dividend satisfy that criteria.
2. It gives the signal that the company's earnings are stable and the growth is on track.
3. Institutions are attracted to those company which gives regular dividend
4. There can be tax advantage depending on the law of the country. In India dividends on equity are tax free.
The disadvantages are:
1. The company can use in a better manner or give better return on the funds which has been distributed as dividend.
2. The tax laws may not be in favour of paying dividend, in those cases the company may opt for share repurchase or giving capital gain benefits.
Practical considerations for payment of dividend are:
Financial Need of company, Shareholders Expectations, Closely/Widely Held Company, Constraints on Paying Dividends, Legal Restrictions, Liquidity, Borrowing Capacity, Access to the Capital Market, Restrictions in Loan Agreements. Hence Dividend policy is a major responsibility of the board of directors. Thus Factors influencing dividend policy
? Growth rate
? Stability of earnings
? Return on equity ...
This gives steps to prepare financial plan and cash flow statement