Case Study Warner Body Works

Great Essays
Assignment2

Submitted to: Submitted by:
Dr. Bashir Ahmad Anas Siddiqui (16-10711)
Course: BUSN 321(B)
Fall 2014
No of attached pages (10)

Warner Body Works
Case 35: Dividend Policy
Case Summary:
Warner Body Works has been known as the leading producer of custom coachwork for automobiles, delivery trucks and other special purposes vehicles. In order to increase their business growth the company in 1980 started the acquisition program.
The company saw good opportunities in the newly developing fields of robotics and material sciences. The company acquired many small firms engaged in both pure and applied research in robotics
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Every year company RESTATES its liberal dividend policy of 60% of earnings. But due to heavy payout the amount of income reinvested in company is much low. In result company has to turn down expansion opportunities or it has to rely on external financing. Due to this situation company’ debt ratio has increased to 60% in 1985 from 16.8 in 1977 and its current ratio has decreased to 1.71 in 1985 from 5.5 in 1977. In board of directors meeting four different policies related to dividend payout were discussed and we have to evaluate all these policies and have to submit a report in next board meeting.
QUESTIONS
Evaluate the advantages and disadvantages of each of the four dividend policies in the case of Warner Body Works.
1. A continuation of the present policy of paying out 60% of earnings.
The current policy of dividend is 60 percent payout of earnings and company every year state this policy.
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Firm’s debt position affects dividend policy a lot. For example if firm rely on debt for their expansion then they would follow conservative dividend policy i.e. low payout. As we know that there is a borrowing cost associated with every external financing. So in order to pay back all that interest, company has to retain its profits back into the company which reduces the amount for dividend distribution. As a result, low dividend payout. In addition to it, creditors don’t go to a company which has higher debt ratio or lower Current ratio.
On the other hand, reinvestment in higher NPV projects with internal financing result in increase in the growth of a company. The increase in growth help capital appreciation in market plus company has low borrowing cost which could ensures positive dividend payout in future.

Question no 6

Evaluate Murray’s argument that a reduction in the dividend payout rate would increase stock price versus Bassler’s opinion that such step would bring prices

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