Corporate Finance Example For Students

Corporate Finance When investors prefer low dividend payout and what is the relation between dividend payout and cash flow (what will increase and what will decrease when using low dividend payment?) Dividend payout ratio refers to the amount of earnings of a particular company that seeks to issue out to its investors in the form of cash dividends. Dividends payouts may vary depending on the industry and a low dividend payout may signify a good thing or a bad thing. Investors who may opt for a low dividend payout may mean that they are willing to allow the company plough back its annual earnings for the purpose of capital growth of the company they have invested in as well as capital gains incur lower tax rates. It may show that the investors are willing to forgo part of their dividends to generate greater returns which lead to higher stock market prices (Sedzro 2010). On the bad side, it may mean that the company does not have enough capital to pay dividends to its investors. The relationship between dividend payout and cash flow is that a company that pays higher dividends may seem to be having a greater cash flow to meet its daily operational needs but a company paying low div idend payout may seem to be having a low cash flow hence, the company needs to retain the dividends for operational needs. This therefore, translates to an increase in cash flow and a decrease in dividend payout when using low dividend payout (Sedzro 2010). What is the relationship between tax and dividend payout (using low dividend payout) what will increase and what will decrease? And does tax benefit shareholder and create value to the firm? One of the disadvantages of quoted companies is that they are subject to double taxation where the annual earnings are taxed as well as the dividends paid out to its investors depending on how much revenue was generated and the amount of dividends paid out. This translates to the higher the tax rate the lower the dividend payout as likewise, the lower the tax rate, the higher the dividends payout (Sedzro 2010). When using the low dividend payout, the tax rate will be low as the companys capital gains will be charged at a lower tax rate, this will translate to dividend payout to the investors also being low as the other percentage of the capital is retained by the company for expansion and growth. When tax rate is high, the investor will receive low dividends payouts which are ultimately unfavorable to the shareholders. The company when taxed highly does not benefit the firm as the earnings taxed could have been ploughed back into the business and used for growth, however, ability to pay the required cash creates goodwill and a positive image of the company to the investors who are more likely to invest more as well receive foreign investments (Sedzro 2010). When investors prefer high dividend payout and what is the relation between dividend payout and cash flow (what will increase and what will decrease when using high dividend payment?) When investors demand high dividend payout, it may signify either that the company is able to pay the high dividends to its investors but its stock prices present a poor state of affairs as they are very low or depressed or that the ability to pay the high dividend payout may mean that the company is very mature and has a number of growth opportunities to its disposal. A higher dividend payout leads to low cash flow while a low dividend payout leads to a high cash flow. When a high dividend payout is used, it may translate to a decrease in cash flow and an increase in dividend payout when a high dividend policy is used. This is as a result of lacking enough working capital at various intervals in its operations since most of its capital was used in paying out dividends (Sedzro 2010). Corporate Finance Test Notes3. Compute the IRR and payback period for each project. How should these metrics affect Harris ´s deliberations? How do they compare to NPV as tools for evaluating projects? When and how would you use each? IRR Analysis Table – IRR Sensitivity Analysis | Revenue Change | Match My Doll Clothing Line | Design Your Own Doll (baseline) 3% | 18.24% | 14.68% | 2% | 17.74% | 14.28% | 1% | 17.24% | 13.87% | 0% | 16.74% | 13.46% | -1% | 16.23% | 13.04% | -2% | 15.72% | 12.62% | -3% | 15.21% | 12.19% | -4% | 14.69% | 11.77% | -5% | 14.16% | 11.33% | -6% | 13.63% | 10.90% | The model reflects a change in revenue from +3% to -6%. IRR of NPV is not used because sensitivity is included in the discount rate. Payback Period Analysis Payback period for each of the scenarios: * Match My Doll Clothing Line Expansion (baseline) = 8.43 years * Design Your Own Doll (baseline) = 10.09 years 4. What additional information does Harris need to complete her analyses and compare the two projects? What specific questions should she ask each of the project sponsors? In order to complete her analyses, several questions need to be asked in order for the report to be as fruitful as possible. Thus the questions that could be asked in order for Harris to make good decisions in comparing the two projects, goes as follows. * What changes would be expected in capital expenditures during periods of change? * Are there any hidden labor costs not being considered in the Match My Doll Clothing Line Expansion, similar to the additional labor costs in Design Your Own Doll? * What level of risk does the project Design Your Own Doll pertains? * In hand with revenue-analysis, what are the incremental earnings? * In addition to the risk level of Design Your Own Doll, is the project stable enough not to harm customer relationships? * What is the forecast for the whole industry? What will be the future market share since this affects sales outstanding and in hand revenue? * Based on the data, what will the equity of the company and share price be, taking into account the two projects? Historical data for inventory turnover ratios; days sales outstanding and days payable outstanding would also be additional information that Harris could benefit from. 5. If Harris is forced to recommend one project over the other, which should be recommended? Why? To improve the present value for both projects the management of the company should think of how to improve the projects’ cash flows. Typically, companies aim to increase cash flow from their existing operations by collecting receivables as soon as possible and slowing down their payables without harming their relations with suppliers. The NPV is a forecast, and as with every forecast, the outcome is not given. Typically forecasts for shorter periods are more accurate. The forecast for New Heritage Company is based on a time period of 10 years. I would recommend reducing that time period to provide more accurate cash flow figures. As with all forecasts, the NVP is not free from risks. The management should be aware that risks such as increase in inflation, change in interest rates, and increased competition in the toys business, could have a negative impact on future benefits of selected project. Last, I would recommend for the management to monitor the costs to increase profits. However, the management should weigh the benefits of reducing costs to avoid an adverse effect of diminished profits. If additional cash inflows are achieved, the company should invest a portion of the profits to generate additional money and expand the business through creation of new products and projects.