Case 27

EMI GROUP PLC

Teaching Note

Synopsis

This case examines the April 2007 decision of British music company EMI to suspend its annual dividend as the company struggled to respond to the effect of digital audio distribution on its core business. The EMI case is intended to serve as an engaging introduction to corporate financial policy and themes in managing the right side of the balance sheet. The case contrasts EMI’s storied success with artists such as the Beatles, the Beach Boys, Pink Floyd, and Norah Jones with its recent inability to succeed in financial markets. In light of takeover threats and restructuring costs, EMI’s CFO Martin Stewart must recommend EMI’s dividend policy.

Objectives

The case serves to accomplish the following teaching objectives:

• Introduce the topics of financial policy, such as dividend policy and debt policy.

• Motivate the tension between investment policy and financial policy with respect to the sources and uses of cash.

• Prompt the Modigliani-Miller intuition of financial policy irrelevance and homemade dividends.

• Discuss the ways in which CFOs add value to firms.

• Review the mechanics of corporate dividends.

Advance Assignment Questions

Students may consider the following study questions:

1. What are the central challenges facing the EMI management team?

2. As CFO, how can Martin Stewart contribute to successfully managing EMI?

3. What do you learn from the sources-and-uses statement provided in case Exhibit 7? What are the implications for EMI’s dividend policy?

4. What dividend policy would you recommend for EMI?

Supplementary Material

An Excel spreadsheet (Case_27.xls) is available for students.

Hypothetical Teaching Plan

1. How is EMI doing? What are your concerns? What does EMI have going for itself?

2. It seems like this dividend decision is a big deal. Do shareholders generally prefer firms that pay...