Essay on Georgia Atlantic Company

4270 Words Mar 17th, 2013 18 Pages
Case 19

Georgia Atlantic Company

Dividend Policy

CASE INFORMATION

Purpose

The purpose of this case is to have students examine dividend policy--cash dividends, stock splits, and stock dividends--from the viewpoint of its effect on corporate share prices.

Time Required

About one and a half hours of student preparation. If the case is to be written up and handed in, double the time required.

Complexity

A--relatively simple.

Flexibility

This case can be used in several ways. In the introductory course, the case can be used as the basic structure for a lecture or as a written assignment in conjunction with lecture and text material. In our more advanced courses, which usually have smaller enrollments,
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We do not know what capital gains stockholders in other lumber company stocks received, nor do we know their average dividend yields, but if their capital gains matched the 7 percent earnings growth, then their realized return was 7 percent plus at least some dividend yield. Georgia Atlantic stockholders, on the other hand, would have received, on average, a 2.47 percent capital gains return plus a zero dividend yield. So, if Georgia Atlantic were selling at the same P/E as the average stock, Georgia Atlantic stockholders would be getting lower returns, which would lead to a falling price and P/E ratio. This does indeed appear to have happened.

Question 4

High priced stocks such as Georgia Atlantic's are not attractive to all investors because many cannot afford to trade in round lots of 100 shares for which the commission costs are lower. Georgia Atlantic's very high price per share is far above the range that most people on Wall Street would say is optimal. To maximize the value of the firm's shares, Wall Street people often say that a stock's price should fall in the range between $20 and $80. A stock split would probably be advisable to move the price of Georgia Atlantic's shares somewhat closer to the range that is considered optimal.

There are people who would argue with this position (but not many). The counter argument is the one expressed by Junior based on commission costs. That argument might have been valid years ago, but today

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