Jpmorgan income&growth PLC

Jpmorgan income&growth PLC

 

In 1984 Stewart Myers wrote, ‘our theories do not seem to explain actual financing behaviour’, when referring to the capital structure debate. In what ways do the main Modigliani and Miller (MM) economic models of gearing fail? Discuss some alternative explanations for the actual gearing levels of a company you know well (the company you have chosen for your assessment one).
Tip: Refer to Chapter 18 in Arnold, G. (2012). Corporate Financial Management. 5th Edition. Pearson.

Term Loans
Debenture
Bonds (including redeemable, convertible bonds, Euro bond etc)
Warrant
Lease
Examine advantages and disadvantages of these sources of debt finance to the firms. Refer to the recommended text (Chapter 11 Arnold G (2012) ) and week 8 lecture notes (Long term Debt finance)
Factors influencing selection of policy might also include
1. Legal requirements
There is no legal compulsion on the part of a company to distribute dividend. However, there certain conditions imposed by law regarding the way dividend is distributed. Basically there are three rules relating to dividend payments. They are the net profit rule, the capital impairment rule and insolvency rule.

2. Firm’s liquidity position
Dividend payout is also affected by firm’s liquidity position. In spite of sufficient retained earnings, the firm may not be able to pay cash dividend if the earnings are not held in cash.

3. Repayment need
A firm uses several forms of debt financing to meet its investment needs. These debt must be repaid at the maturity. If the firm has to retain its profits for the purpose of repaying debt, the dividend payment capacity reduces.

4. Expected rate of return
If a firm has relatively higher expected rate of return on the new investment, the firm prefers to retain the earnings for reinvestment rather than distributing cash dividend.

5. Stability of earning
If a firm has relatively stable earnings, it is more likely to pay relatively larger dividend than a firm with relatively fluctuating earnings.

6. Desire of control
When the needs for additional financing arise, the management of the firm may not prefer to issue additional common stock because of the fear of dilution in control on management. Therefore, a firm prefers to retain more earnings to satisfy additional financing need which reduces dividend payment capacity.

7. Access to the capital market
If a firm has easy access to capital markets in raising additional financing, it does not require more retained earnings. So a firm’s dividend payment capacity becomes high.

8. Shareholder’s individual tax situation
For a closely held company, stockholders prefer relatively lower cash dividend because of higher tax to be paid on dividend income. The stockholders in higher personal tax bracket prefer capital gain rather than dividend gains.
Core reading Chapter 19 Arnold G 2012

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