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C what are the key factors to consider when setting

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Unformatted text preview: ntly affect future financing opportunities and costs and the firm’s share price. She also knows that she must be sure her proposal is complete and that it fully educates the board with regard to the long-term implications of each policy. Required a. Analyze each of the three dividend policies in light of GAC’s financial position. b. Which dividend policy would you recommend? Justify your recommendation. c. What are the key factors to consider when setting the amount of a firm’s initial annual dividend? d. How should Ms. McNeely go about deciding what initial annual dividend she will recommend to the board? e. In view of your dividend policy recommendation in part b, how large an initial dividend would you recommend? Justify your recommendation. WEB EXERCISE WW W Go to the Web site www.smartmoney.com. In the column on the right under Quotes & Research enter the symbol Dis; click on Stock Snapshot; and then click on Go. 1. What is the name of the company? 2. What is its dividend amount? Its dividend frequency? Its dividend yield? Its return on equity (ROE)? CHAPTER 13 Dividend Policy 589 Enter those data into the matrix below. Then click on the Key Ratios tab and enter the current ROE. Enter the next stock symbol into the box on the bottom of the page under Stock Search and then click on Submit. Complete the following matrix in that manner. Symbol Company name $ Amount Dividend frequency Yield % ROE DIS AIT MRK LG LUV IBM GE BUD PFE INTC 3. Which of the companies have the lowest dividend yields? 4. Which of the companies have the highest dividend yields? 5. Looking at return on equity, can you draw any conclusions about the relationship between dividends and ROE? Remember to check the book’s Web site at www.aw.com/gitman for additional resources, including additional Web exercises. INTEGRATIVE CASE 4 O’Grady Apparel Company ’Grady Apparel Company was founded nearly 150 years ago when an Irish merchant named Garrett O’Grady landed in Los Angeles with an inventory of heavy canvas, which he hoped to sell for tents and wagon covers to miners headed for the California goldfields. Instead, he turned to the sale of harder-wearing clothing. Today, the O’Grady Apparel Company is a small manufacturer of fabrics and clothing whose stock is traded on the over-the-counter exchange. In 2003, the Los Angeles–based company experienced sharp increases in both domestic and European markets resulting in record earnings. Sales rose from $15.9 million in 2002 to $18.3 million in 2003 with earnings per share of $3.28 and $3.84, respectively. The European sales represented 29% of total sales in 2003, up from 24% the year before and only 3% in 1998, 1 year after foreign operations were launched. Although foreign sales represent nearly one-third of total sales, the growth in the domestic market is expected to affect the company most markedly. Management expects sales to surpass $21 million in 2004, and earnings per share are expected to rise to $4.40. (Selected income statement items are presented in Table 1.) Because of the recent growth, Margaret Jennings, the corporate treasurer, is concerned that available funds are not being used to the...
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