Dividend Policy Assignment Help in Finance

Dividends are those earnings which are distributed among stockholders of a company. These earnings are paid either in cash or in stock, generally on a quarterly basis and may be paid only out of retained earnings, not from invested capital. Dividends are only paid when the company’s profitability can support this payout. The more and regular the company’s profitability, the regular the payment of dividends. The amount of dividend paid for each share depends on the organization’s policy towards them. Organizations are not obligated legally to pay dividends, but to keep the investors interested in the organization, the management pays out dividend, though the percentage of dividends per share can differ from year to year, as it depends on the profitability of the company.

There are other factors also which decide the payment of dividend in the company. These include corporate growth rate, restrictive covenants, earnings stability, degree of debt and tax factors.

Dividend Policy

Dividend Policy is important in addressing certain factors such as:

Influences the investors’ decisions: General public which wants to invest in an organization will look for two factors, the profitability of the company and the overall growth rate of the company. Profitability will determine the company’s dividend payout ratio and of course growth rate of the company is also an important factor. So, a company seeking good investor support shall have to decide a dividend policy which can keep the investors happy.

Impact on finance program and capital budget of a company: Dividend policy is one of the factors influencing a company’s finance and capital budget. The profits of a company pertaining to a quarter or a year are generally taken into consideration. These profits are either saved as retained earnings or they can be paid out. Retained earnings are good source of generating internal finance. A company cannot in many circumstances save 100% of the profits or payout 100% of the profits as dividends. Many a times, it needs to strike a balance between dividend payout ratio and retained earnings ratio. The percentages can be 50: 50, 60:40, 70:30, etc.

A company cannot afford paying out high dividend rates every year. Instead, it can adopt a low dividend payout ratio which can be helpful during the years of low earnings as well.

High dividend ratio will affect the cash flow of the company. Companies with poor liquidity ratio cannot payout dividends because of less availability of cash.

High dividend ratio will decrease the stockholders’ equity, since dividends are paid from retained earnings. The result is higher debt to equity ratio.

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Working Capital Management in Finance from HelpWithAssignment.com

Working Capital Management in Finance

Working Capital can be simply defined as a firm’s net working capital as its current assets minus current liabilities. Net working capital is the capital required in the short term asset accounts such as cash, inventory and account receivable, as well as short-term liability accounts such as accounts payable.

Most projects require the form to invest in net working capital. The main components of net working capital are cash, inventory, receivables and payables. Working capital includes the cash that is needed to run the firm on a day to day basis. It does not include excess cash, which is cash that is required to run the business and can be invested at a market rate. Excess cash may be viewed as part of the firm’s capital structure, offsetting firm debt. Increase in net working capital represents an investment that reduces the cash that is available to the firm. Therefore, working capital alters a firm’s value by affecting its free cash flow.

The level of working capital reflects the length of time between when cash goes out of a firm at the beginning of the production process and when it comes back in. A company first buys inventory from its suppliers, in the form of either raw materials or finished goods. Even if the inventory is in the form of finished goods, it may sit on the shelf for some time before it is sold. A firm typically, buys its inventory on credit, which means that the firm does not have to pay cash immediately at the time of purchase. When the inventory is disposed of, it is often sold on credit. A firm’s cash cycle is the length of time between when the firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory.

Cash Conversion Cycle (CCC) = Inventory Days + Accounts Receivable Days – Accounts Payable Days

Where,

Inventory Days = Inventory/ Avg. Daily Cost of Goods Sold

Accounts Receivable Days = Accounts Receivable/ Avg. Daily Sales

Accounts Payable Days = Accounts Payable/ Avg. Daily Cost of goods sold

The firm’s operating cycle is the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling its product. If the firm pays cash for its inventory, this period is identical to the firm’s cash cycle. However, most firms buy their inventory on credit, which reduces the amount of time between the cash investment and the receipt of cash from that investment.

The longer a firm’s cash cycle, the more working capital it has, and the more cash it needs to carry to conduct its daily operations.

Any reduction in the working capital requirements generates a positive free cash flow that the firm can distribute immediately to shareholders. For example, if a firm is able to reduce its required net working capital by $50,000, it will be able to distribute this $50,000 as a dividend to its shareholders immediately.

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This article is in continuation with our previous articles on Finance which include Bonds, Sensitivity Analysis, Financial Statement Analysis, Mergers and Acquisitions

Bonds in Finance from HelpWithAssignment.com

A bond is a security sold by governments or corporations in order to raise money from investors today in exchange for the promised future payment. The terms of a bond are described as part of the Bond Certificate, which indicated that the amounts and dates of all payments to be made. These payments are made until a final repayment date is known as the term of the bond.

Bonds are typically make two types of payments to their holders. The promised interest payments of a bond are called coupons. The Bond Certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond. The principal or face value of a bond is the notional amount e use to compute the interest payments. Usually, the face value is repaid at maturity. It is generally denominated in standard increments such as $1000. A bond with a $1000 face value, for example, is often referred to as a “$1000 bond”.

The amount of each coupon payment is determined by the coupon rate of the bond. This coupon rate is set by the issuer and stated on the bond certificate. By convention, the coupon rate is expected as an APR s the amount of each coupon payment, CPN is

CPN = (Coupon Rate × Face value)/ Number of coupon payments per year

For example, a $1000 bond with a 10% coupon rate and semi annual payments will pay coupon payments of $1000 × 10%/2 = $50 every six months.

Zero Coupon Bonds:

The simplest type of bond is a zero-coupon bond, a bond that does not make coupon payments. The only cash payment the investor receives is the face value of the bond on the maturity date. Treasury Bills, which are US government bonds with a maturity of up to one year, are zero-coupon bonds. As the present value of a future cash flow is less that the cash flow itself, as a result, prior to its maturity date, the price of a zero-coupon bond is always less than its face value. That is, zero-coupon bonds always trade at a discount (a price lower than the face value), so they are also called pure discount bonds.

Suppose that a one-year, risk-free, zero-coupon bond with a $100000 face value had an initial price of $96618.36. If you purchased this bond and held it to maturity, you would have the following cash flows:

0	1
$96618.36	$100000

Although, the bond pays no interest directly, as an investor you are compensate for the time value of your money by purchasing the bond at a discount to its face value.

Yield to Maturity:

The IRR of an investment opportunity is the discount rate at which the NPV of the investment opportunity is equal to zero. The IRR of an investment in zero-coupon bond is the rate of return that investors will earn on their money if they buy the bond at its current price and hold it to maturity. The IRR of an investment in a bond is given a special name, the yield to maturity (YTM) or just the yield.

The yield to maturity of a bond is the discount rate that sets the present value of the promised bond payments to the current market price of the bond.

The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment.

Let’s determine the yield to maturity of the one year zero coupon bond. The yield to maturity of the one year bond solves the following equation:

96,618.36 = 100000/1+ YTM

In this case, 1+ YTM = 100000/ 96,618.36 = 1.035

That is, the yield to maturity for this bond is 3.5%. Because the bond is risk free, investing in this bond and holding it to maturity is like earning 3.5% interest on your initial investment. Thus, by the Law of One Price, the competitive market risk-free interest rate is 3.5%, meaning all one year risk-free investments must earn 3.5%.

Similarly, the yield to maturity for a zero-coupon bond with n periods to maturity, current price P and face value FV is

P = FV/ (1+ YTM_n)ⁿ

Rearranging this expression, we get

Yield to Maturity of an n Year Zero Coupon Bond

YTM_n = (FV/P)^1/n –1

Coupon Bonds:

Like Zero-coupon bonds, Coupon Bonds pay investors their face value at maturity. In addition, these bonds make regular coupon interest payments. Two types of US Treasury coupon securities are currently traded in financial markets. Treasury Notes, which have original maturities from one to ten years and Treasury Bonds, which have original maturities of more than ten years.

We can compute the yield to maturity of a coupon bond. The yield to maturity for a bond is the IRR of investing in the bond and holding it to maturity; it is the single discount rate that equates the present value of the bond’s remaining cash flows to its current prices,

0	1	2	3	N
-P	CPN	CPN	CPN	CPN + FV

Because the coupon payments represent an annuity, the yield to maturity is the interest rate y that solves the following equations:

Yield to Maturity of a Coupon Bond

P = CPN × 1/y(1-1/(1+y)ⁿ) + FV/(1+y)^N

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This article is in continuation with our previous articles on Finance which include Private and Venture Capital, Mergers and Acquisitions, Capital Structure, Bond Valuation

Analysis of a Cash flow statement in Finance from HelpWithAssignment.com

The analysis of a company’s cash flows can provide useful information for understanding a company’s business earnings and for predicting its future cash flows. There are various tools and techniques for analyzing the statement of cash flows, including the analysis of major sources and uses of cash, cash flow, common size analysis, conversion of the cash flow statement from the indirect method to the direct method and computation of free cash flow and cash flow ratios.

Evaluation of the sources and uses of Cash:

Evaluation of cash flow statement should involve an overall assessment of the sources and uses of cash between the three main categories as well as an assessment of the main drivers of cash flow within each category.

• Evaluate where the major sources and uses of cash flow are between operating, investing and financing activities.
• Evaluate the primary determinants of operating cash flow.
• Evaluate the primary determinants of investing cash flow.
• Evaluate the primary determinants of financing cash flow.

Step 1: The major sources of cash for a company can vary with its stage of growth. For a mature company, it is desirable to have the primary source of cash be operating activities. Over the long term, a company must generate the cash from its operating activities. If operating cash flow were consistently negative, a company would need to borrow money or issue stock (financing activities) to fund the shortfall. Eventually, these providers of capital need to be repaid from operations or they will no longer be willing to provide capital. Cash generated from operating activities can either be used in investing or financing activities. If the company has good opportunities to grow the business or other investment opportunities, it is desirable to use the cash in investing activities.

Step 2: Turning to the operating section, the analysts should examine the most significant determinants of operating cash flow. Some companies need to raise cash for use in operations (to hold receivables, inventory, etc) while occasionally a company’s business model generates cash flow (eg. When cash is received from customers before it needs to be paid out to suppliers). Under the direct method, the increases and decreases in receivables, inventory and payables and so on can be examined to determine whether the company is using or generating cash in operations and why. It is also useful to compare operating cash flow with net income. For a mature company, because net income includes noncash expenses (depreciation and amortization), it is desirable that operating cash flow exceeds net income.

Step 3: Within the investing section, one should evaluate each line item. Each line item represents either a source of use of cash. This enables us to understand where the cash is being spent (or received). This will also tell us how much cash is being invested for the future in property, plant and equipment. How much is used to acquire entire companies and how much cash is being raised by selling these types of assets. If the company is making major capital investments, you should consider where the cash is coming from to cover these investments (eg in the cash coming form excess operating cash flows or from the financing activities).

Step 4: Within the financing area, we should examine each line item to understand whether the company is raising capital or repaying capital and what the nature of its capital sources are. If the company is borrowing each year, you should consider when repayment may be required.

Common-Size Analysis of the statement of Cash Flows:

In common-size analysis of a company’s income statement, each income and expense line item is expressed as a percentage of net revenues (net sales). For the common-size balance sheet, each asset, liability and equity line item is expressed as a percentage of total assets. For the common-size cash flow statement, there are two alternative approaches. The first approach is to express each line item of cash and second approach is to express each line item as a percentage of net revenue.

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This article is in continuation with our previous articles on Finance which include Private and Venture Capital, Mergers and Acquisitions, Corporate Finance, Capital Structure

Preparing Consolidated Statements of Cash Flows from HelpWithAssignment.com

A Company has to publish a Statement of Cash Flow along with the Income Statement and Balance Sheet. The cash acquisition of a controlling interest in a company is considered an investing activity and would appear as a cash outflow in the cash flows from the investing activities section of the statement of cash flows. It is also necessary to explain the total increase in consolidated assets and the addition of the NCI to the consolidated balance sheet. This is a result of the requirement that the statement of cash flows disclose investing and financing activities that affect the company’s financial position even though they do not impact cash.

Net income is the largest source of cash, but in calculating net income some noncash expenses are deducted. These noncash expenses such as depreciation and amortization of capitalized software and other intangibles do not require a cash payment. Within the cash flow statement net income is subsequently adjusted to align with cash flows by “adding back” noncash expenses such as depreciation and amortization. In a similar manner, an adjustment must be made for deferred taxes. The change in deferred taxes represents the difference between the tax expenses on the income statement and what was actually paid to the taxing authorities.

The second section of cash from operating activities presents the year-to-year changes in operating assets and liabilities. Eg. Accounts receivables, inventories and so on.

Let us look at a small example:

Assets	Amount	Liabilities	Amount
Cash and cash equivalents	50000	Long term liabilities	150000
Inventory	60000	Common Stock	200000
Equipment	190000	Retained Earnings	350000
Building	400000
Total Assets	700000	Total	700000

Assume the fair values of the equipment and building are $250000 and $425000 respectively and any remaining excess of cost is attributed to goodwill. The estimated remaining life of the equipment in 5 years and of the building is 10 years.

The following value analysis schedule and D&D schedule were prepared:

Value Analysis Schedule	Company Implied Fair Value	Parent Price (80%)	NCI Value (20%)
Company Fair Value	$675000	$540000	$135000
Fair value of net assets excluding goodwill	635000	508000	127000
Goodwill	40000	32000	8000

Based on the above information, the following D&D schedule is prepared:

Determination And Distribution of Excess Schedule

	Company Implied Fair Value	Parent Price (80%)		NCI Value (20%)
Fair Value of Subsidiary	$675000	$540000		$135000
Less book value of interest acquired:
Common Stock	$200000
Retained Earnings	350000
Total Stockholders’ equity	$550000	$550000		$550000
Interest acquired		80%		20%
Book Value		$440000		$110000
Excess of fair value over book value	125000	100000		25000
Adjustment of Identifiable Accounts:	Adjustment	Amortization per year	Life		Worksheet Key
Equipment (250000 – 1900000)	60000	12000	5		Debit D1
Building (425000 –400000)	25000	2500	10		Debit D2
Goodwill (675000 —635000)	40000				Debit D3
Total	125000

The effect of the purchase on the balance sheet accounts of the consolidated company would be as follows:

	Debit	Credit
Cash (540000 – 50000 subsidiary cash)		490000
Inventory	60000
Equipment (190000 book value + 60000 excess)	250000
Building (400000 bookvalue + 60000 excess)	425000
Goodwill	40000
Long term liabilities		150000
Non controlling interest (20% * 550000 subsidiary equity + 25000 NCI adjustment)		135000
Total	775000	775000

The disclosure of the purchase on the statement of cash flows would be summarized as:

Under the heading “Cash Flows from investing activities”

Payment for the purchase of Company S, net of cash acquired $149000

In the supplemental schedule of noncash financing and investing activity:

Company P acquired 80% of the common stock of Company S for $540000. In conjunction with the acquisition, liabilities were assumed and an NCI was created as follows:

Adjusted value of assets acquired ($700000 book value + $125000 excess) $825000

Cash paid for common stock 540000

Balance (noncash) $285000 Liabilities assumed $150000 Noncontrolling interest $135000

Noncash acquisition of Controlling Interest

Suppose that instead of paying cash for its controlling interest, Company P issued 10000 shares of its $10 par stock for the controlling interest. Further we assume the shares had a market value of $54 each. Since the acquisition price is the same (#540000), the determination and distribution of excess schedule would not change. The analysis of balance sheet account changes would be as follows:

	Debit	Credit
Cash ($50000 subsidiary cash)	50000
Inventory	60000
Equipment ($190000 book value + $60000 excess)	250000
Building ($400000 book value + $25000 )	425000
Goodwill	40000
Long term Liabilities		150000
Noncontrolling interest (20% * $555000, subsidiary equity + $25000 NCI adjustment)		135000
Common stock ($10 par), Company P		100000
Paid-in capital in excess of par, Company P		440000
Total	825000	825000

A business combination will have ramifications on the statements of cash flows prepared in subsequent periods. An acquisition may create amortizations of excess deductions (non cash items) that need to be adjusted. In addition, there may be changes resulting from additional purchases of subsidiary shares and/or dividend payments by the subsidiary. Intercompany bonds and nonconsolidated investments also need to be considered for their impact.

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This article is in continuation with our previous articles on Finance which include CAPM Model, Merger & Acquisitions, Corporate Finance, Capital Structure, Bond Valuation