What is your opinion when Ms

What is your opinion when Ms - What is your opinion when...

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What is your opinion when Ms. Rodriquez states, “I don’t think we should commit to paying out high dividends, but perhaps we could use some of our cash to repurchase stock.”? Ms. Rodriquez is probably correct when she states: “I don’t think we should commit to paying out high dividends, but perhaps we could use some of our cash to repurchase stock.” A payout ratio of 66.5% is likely too high to be maintained in the future, but a share repurchase might send a positive signal to the markets without creating the expectation of continued high dividend payout. Should other opportunities arise in the future (i.e., a drug for treatment of liver diseases or an acquisition in the biotech field), Penn Schumann would have the option to retain a larger portion of income without reducing the payout ratio. In addition, since debt ratios would improve even with a share repurchase (as shown in the spreadsheet), Penn Schumann may also have additional borrowing capacity to finance such ventures. A payout in the form of a share repurchase would also serve to alleviate the impression that “we fritter away cash on easy living.” What impact would a share repurchase have on dividend policy? It is true that company is currently holding too much of cash. The amount of cash and cash equivalents in the balance sheet of the company at the end of year 2008 is $7.061 Billion, which is $1.510 Billion higher than the cash and cash equivalents of $5.551 Billion held by the company at the end of the year 2007. This means that in spite of company paying dividends to the tune of 35% payout ratio and incurring a capital expenditure of $2.063 Billion. This means that the company is generating enough cash to manage its current operations, pay reasonable amount of dividends and incur a reasonable amount of capital expenditure.
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This note was uploaded on 01/29/2012 for the course BUSINESS LU124475 taught by Professor Prof.johns during the Spring '09 term at Liberty.

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What is your opinion when Ms - What is your opinion when...

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