Bfin

Case 17

9. Would you recommend that FFI split its stock, or pay a large stock dividend? Also, should it use small annual stock dividends in the future?

Answer: Since stock split will reduce the price per share in proportion to increase the number of shares outstanding, so the company should split their stocks only if the price is quite high and management thinks the future is bright. A stock dividend plays a similar role by paying additional shares as dividend rather than in cash. I would not recommend that FFI split its stock or pay a large stock dividend. Since the firm faced problems in its product market and it is decline in growth. This is no bright prospects. Also Philip don’t want loss control of FFI, he should not reduce the stock price and increase outstanding shares.

10. Would you recommend company repurchase stock as an alternative to cash dividends, if it decides to remit cash to its stockholders?

Yes I would recommend company repurchase stock as an alternative to cash dividends. First, because company’s ratio is significantly above the industry average, FFI can restructure the company’s capital structure without increasing the company’s debt by repurchasing stock. Second, stock repurchases can offer value to its stock holders as well and the taxes from capital gains are lower than taxes on dividends. Third, unlike a cash dividend, a stock repurchase gives the decision to the investor. A stockholder can choose to tender his shares for repurchase, accept the payment and pay the taxes. With a cash dividend, a stockholder has no choice but to accept the dividend and pay the taxes. Taking a repurchases can be a positive signal to stockholders that management thinks stock is undervalued.

11. If the company does decide to start paying cash dividends, should they also offer a dividend reinvestment plan?

They should offer a dividend reinvestment plan that involve newly issued stock. In this way, the firm can raise new equity capital and increase the...