Sure! Let's break down each concept and policy you mentioned:
Dividend Types
-
Regular Dividend: This is a standard payment made by a corporation to its shareholders, usually declared quarterly. It reflects the company's ongoing profitability and is a way to share earnings with investors.
- Advantages: Predictable income for shareholders, signals financial health, can stabilize stock prices.
- Disadvantages: Reduces retained earnings available for reinvestment, obligations to maintain regular payments even in downturns.
-
Liquidating Dividend: This type of dividend is paid when a company is partially or fully liquidating its assets. It essentially returns capital to shareholders.
- Advantages: Allows shareholders to recoup their capital invests, often comes at the end of a company’s operational life.
- Disadvantages: Signals financial trouble or decline, potentially negative impact on the company’s reputation.
-
Extra Dividend: An extra or special dividend is a one-time payment made to shareholders on top of the regular dividend, usually when a company has excess cash or profits.
- Advantages: Provides a bonus return to shareholders, reflects strong financial performance.
- Disadvantages: Can create expectations for future extra dividends, reduces cash reserves temporarily.
Dividend Policies
-
Residual Dividend Policy: Dividends are paid from the remaining earnings after all profitable investment opportunities have been funded.
- Advantages: Prioritizes reinvestment in growth opportunities, protects the company’s financial health.
- Disadvantages: Dividends can be inconsistent, which may deter income-focused investors.
-
Regular Dividend Policy: Companies set a fixed dividend payout based on predictable earnings.
- Advantages: Attracts investors looking for income, signals stability to the market.
- Disadvantages: Can create pressure to maintain dividends even in downturns.
-
Low Regular Plus Extra Dividend Policy: A company pays a low regular dividend complemented by extra dividends during profitable years.
- Advantages: Flexibility to increase returns to investors during good times while maintaining a base payout.
- Disadvantages: Complicates expectations for shareholders and may not attract long-term income investors.
Concepts
-
Stock Split: A company divides its existing shares into multiple new shares to increase liquidity. The total value remains the same but the price per share decreases.
-
Reverse Stock Split: A company consolidates its shares to reduce the number of outstanding shares and increase the share price.
-
Stock Repurchases: A company buys back its own shares from shareholders, which can increase the value of remaining shares and provide shareholders with cash.
-
Stock Dividend: Instead of paying cash, a company issues additional shares to shareholders. This dilutes share value but maintains cash flow.
-
Dividend Reinvestment Plan (DRIP): Allows shareholders to reinvest their dividends to purchase more shares automatically, which can compound returns over time.
Alpha Company Dividend Calculation
Given:
- Capital investment need = Br 100,000,000
- Net income = Br 150,000,000
- Target capital structure = 60% equity
Step 1: Calculate total equity needed. \[ \text{Equity Needed} = \text{Total Investment} \times \text{Equity Ratio} = 100,000,000 \times 0.60 = 60,000,000 \]
Step 2: Calculate residual earnings available for dividends. \[ \text{Dividends} = \text{Net Income} - \text{Equity Needed} = 150,000,000 - 60,000,000 = 90,000,000 \]
Thus, assuming the company follows the residual dividend policy, the dividend to be paid would be Br 90,000,000.
Working Capital Investment Policies
-
Relaxed Policy: Maintains a high level of working capital, includes extra inventory and liberal credit terms.
-
- Pros: Less risk of stockout or financial distress.
-
- Cons: Increased carrying costs and lowered potential returns.
-
-
Restricted Policy: Maintains a very tight control on working capital, emphasizing strict inventory and credit management.
-
- Pros: Reduced carrying costs improve profitability.
-
- Cons: Risk of stockouts and unhappy customers due to lack of available products.
-
-
Moderate Policy: A balanced approach, keeping working capital within reasonable limits while allowing for growth.
-
- Pros: Flexibility to exploit growth opportunities.
-
- Cons: May not capitalize fully on advantages of either extreme policy.
-
Implications of Working Capital Financing Policies
-
Maturity Matching Policy: Matches the timing of cash inflows from short-term financing with short-term cash uses, balancing risk and liquidity.
-
Conservative Policy: Minimizes risk by financing long-term uses with long-term capital and maintaining high liquidity.
-
Aggressive Policy: Takes on more risk by funding long-term assets with short-term financing, potentially maximizing returns but increasing exposure.
Factors Determining the Level of Working Capital
-
Business Cycle: Economic conditions can affect demand and inventory levels.
-
Credit Policy: The company's terms for credit can influence levels of receivables.
-
Inventory Management: Stock levels affect working capital needs.
-
Seasonality: Businesses with seasonal peaks may require different levels of working capital at different times.
-
Market Competition: Competitive pressures may force a company to maintain higher inventories.
-
Operational Efficiency: Efficient operations reduce the amount of working capital tied up in day-to-day activities.
Cash Conversion Cycle Effects
-
Higher financing rates induce the firm to reduce its level of inventory: This will shorten the inventory turnover time, potentially decreasing the cash conversion cycle.
-
The firm obtains a new line of credit that enables it to avoid stretching payables to its suppliers: This can decrease the payables period, which may also shorten the cash conversion cycle.
-
The firm factors its accounts receivable: This speeds up the collection of receivables, thus reducing the cash conversion cycle.
-
A recession occurs, and the firm’s customers increasingly stretch their payables: This extends the payables period, lengthening the cash conversion cycle.
Costs and Benefits
a) Cash:
- Benefits: Provides liquidity, can be used for unexpected expenses or emergencies.
- Costs: Opportunity cost from not investing, inflation depreciation over time.
b) Receivables:
- Benefits: Can produce income through financing; transitional asset between sales and cash.
- Costs: Risk of defaulting customers, can tie up significant funds.
c) Inventories:
- Benefits: Meet customer demand, prevent stockouts.
- Costs: Carrying costs, potential for obsolescence or spoilage.
Lock Box System Computation
-
Collection Float Reduction:
- Current float time: 6 days, new float time: 4 days
- Float reduction: 6 - 4 = 2 days
- Daily collections = $10,000
- Float reduced = $10,000 * 2 = $20,000
-
Daily Interest Savings:
- Daily interest = float reduction * interest rate = $20,000 * 0.02 = $400.
-
Maximum Monthly Fee:
- Monthly savings from reduced float = Daily savings * 30 days = $400 * 30 = $12,000.
Baumol’s Model
-
Economic Level of Cash: \[ C^* = \sqrt{\frac{2DS}{i}} \]
- Where D = yearly cash usage ($200,000), S = cost of selling securities ($20), i = interest rate (0.02). \[ C^* = \sqrt{\frac{2 \times 200,000 \times 20}{0.02}} = \sqrt{\frac{8,000,000}{0.02}} = \sqrt{400,000,000} \approx 20,000 \]
-
Times to Sell Securities: \[ N = \frac{D}{C^*} = \frac{200,000}{20,000} = 10 \text{ times per year} \]
-
Average Cash Balance: \[ \text{Average Cash Balance} = \frac{C^*}{2} = \frac{20,000}{2} = 10,000 \]
-
Annual Opportunity Cost: \[ \text{Annual Opportunity Cost} = \text{Average Cash Balance} \times i = 10,000 \times 0.02 = 200 \]
-
Annual Cost of Trading Securities: \[ \text{Annual Cost} = N \times S = 10 \times 20 = 200 \]
Economic Order Quantity (EOQ)
-
Economic Order Quantity: \[ EOQ = \sqrt{\frac{2DS}{H}} \]
- Where D = annual demand (7,200 units), S = ordering cost ($250), H = carrying cost per unit (cost * carrying rate = $50 * 0.20 = $10). \[ EOQ = \sqrt{\frac{2 \times 7200 \times 250}{10}} = \sqrt{\frac{3,600,000}{10}} = \sqrt{360,000} \approx 600 \]
-
Total Costs (Ordering Costs + Carrying Costs):
-
Ordering Costs: \[ \text{Number of Orders} = \frac{D}{EOQ} = \frac{7200}{600} = 12 \] \[ \text{Total Ordering Cost} = \text{Number of Orders} \times S = 12 \times 250 = 3000 \]
-
Carrying Costs: \[ \text{Average Inventory} = \frac{EOQ}{2} = \frac{600}{2} = 300 \] \[ \text{Total Carrying Cost} = Average Inventory \times H = 300 \times 10 = 3000 \]
-
Total Costs: \[ 3000 + 3000 = 6000 \]
-
Purchasing Terms
Cost of Not Taking Discount:
- Discount terms: 3/15, n/45 implies a 3% discount if paid within 15 days, otherwise, full payment is due in 45 days.
- Annualized cost = \[\left(\frac{Discount \times 360}{(100 - Discount) \times (Days Credit - Days Discount)}\right)\]
- = \[\left(\frac{0.03 \times 360}{0.97 \times 30}\right) \approx 0.1113\] or approximately 11.13% annualized cost.
5 C's of Credit Standards
-
Character: Refers to the borrower's reputation and track record in repaying debts.
-
Capacity: The ability of the borrower to repay the loan based on their cash flow and net income.
-
Capital: The amount of personal investment in a venture; shows how committed the borrower is.
-
Collateral: Assets pledged as security for the repayment of the loan, reducing the lender's risk.
-
Conditions: Refers to the economic environment and other factors that might affect the borrower's ability to repay.
Length of Credit Period Factors
-
Customer's Creditworthiness: More trustworthy customers may receive longer credit terms.
-
Industry Standards: Norms in the industry dictate the expected credit terms.
-
Cash Flow Needs: The company's cash flow requirements may necessitate tighter or looser credit terms.
This comprehensive overview covers the requested dividend types, policies, working capital investment, credit standards, and associated calculations. Let me know if there’s anything more you would like to discuss!