Options for Funding Dividend Payout or Stock Buyback - Advanced Corporate Finance

Advanced Corporate Finance

Table of Contents
Introduction......................................................................................................................................3
Question 1........................................................................................................................................3
Question 2........................................................................................................................................5
Part A...........................................................................................................................................5
Part B...........................................................................................................................................5
Part C...........................................................................................................................................6
Part D...........................................................................................................................................6
Question 3........................................................................................................................................7
Question 4........................................................................................................................................9
Question 5......................................................................................................................................10
Conclusion.....................................................................................................................................12
References......................................................................................................................................13

INTRODUCTION
The present study is based on the critical assessment of the best option for Eastboro to fund an
increased dividend payout or a stock buyback. Further, discussion has also been made relating to
the financial structure of Eastboro and its unused debt capacity if it pursues a 20 percent payout,
or a 40 percent payout, or a residual payout policy or make no payments of dividend. The study
also covers the response of capital providers, if dividend in 2001 is declared by Eastboro and in
case the company repurchases share. On the basis of analysis, the study will also draw
recommendations corporate-image advertising campaign and corporate name change to the
directors.
QUESTION 1
It is evidenced that Gainesboro, in terms of company priority willing to enhance per share value
to shareholders. The goal of company is to make payment dividend (emphasized in the study and
in the letter of Gaineboro to shareholders implying to resume the payout of dividend in 2005).
On more issues that is obvious about Gainesboro is that the culture of organization is creating an
adverse impact to debt. Unluckily, the cap the company has forced is 40 percent, i.e. the debt to
equity ratio will not be able to surpass this percentage. In the year 2004, funds were borrowed by
the company on an external basis for the payment of dividend, by this the level of debt increased
to 22% and the case highlighted that it was a problem that is put into discussion often in the
corporate meeting and still it is a major issue between the senior executives of company.
Shedding light to the sensitivity to debt of company, it is believed as an unlikely funding source
to finance the 2005 dividend promised by them. Yet, the promised 2005 dividend does not imply

that the stock buyback is not put into question or is not considered. On the other hand, all options
need an extra funding source. In accordance with the What Do We Know about Stock
Repurchases article, it has been stated by financial economists that managerial authorities of
company makes use of repurchases to indicate their optimism regarding the prospects of firm to
the marketplace (Bendig and et.al, 2018).
In the present case scenario, the management tends to vary their investment i.e. less investment
and issue of more stock, and the same does not contravene their policy, however the
management would not be prepared to consider more borrowing, it is because their policy of
borrowing is restricted to 40% debt to equity ratio.
Assessment of decision of Eastboro
(Amount in $)
Year 1999 2000 2001 (Projected)
Sales 815979 756638 870000
Profit Ratio 12993/815979 (140784)/756638 18018/870000
0.015 -0.18 .0207
Debt Equity Ratio 9000/401172 8775/282541 30021/300126
0.022 0.031 0.1
Investment
(Net property, plant
and Equipment)
160190 175355 205530