Summary: Champion Road Machinery Limited, the worlds second largest manufacturer of graders and other large machinery has been performing well above expectations and cash properly managed. A financial analysis of the Champion Road Machinery Company was performed in order to provide recommendations on the dividends distribution policy. Decision on the Company’s dividends policy will depend on three main factors:
- Current financial situation (Cash flow, Required Retained Earnings, Projected Growth, and Equity available for distribution)
- Industry and main competitors’ dividends strategies Types of shareholders and their goals and expectations from the Company Based on the above mentioned information, our recommendation would be to implement Regular-dividend-plus-extra policy.Don't use plagiarized sources. Get Your Custom Essay onChampion Road Machinery
Financial Analyses: In the 6 month period ending July 2, 1994, Champion had generated $12. 3 million in cash compared with the $4. 3million a year earlier. Champion reached a net profit of $8,100,000. 00 and Sales volume reached $155,000,000. 00 (23% increase comparing to 1993). In April 1994, Champion successfully performed IPO and had net cash from IPO of $26,000,000. 0. Part of the cash was used to repay long-term debt.
In addition to this, Champion is very confident that even if it were to purchase a few companies that were likely to meet its criteria, there will still be excess cash to pay out a dividend. Company has the following possible options for the dividend policy: 1. Do not distribute any dividend 2. Distribute a regular dividend 3. Distribute cash via a special dividend or stock repurchase. Arguments for and against declaring dividends in champion’s case Arguments FOR dividends:
If Champion decides to payout a dividend, it will show a good sign for investors because dividends provide certainty about the company’s financial well-being; these dividends will also be attractive for investors looking to secure current income. Companies without a dividend history are generally viewed favorably when they declare new dividends; this will help boost the image of Champion In relation to their competition, Caterpillar and Finning Tractor. There is also a differences in taxes treatment between the US and Canada (see table 2).
Canadian law provides for a dividend tax credit for dividends of Canadian companies and therefore dividend income will see a lower tax bill (for the Canadian investors and directors). Arguments AGAINST dividends: Investors have the ability to create “homemade” dividends. For example, investors looking for a steady stream of income are more likely to invest in bonds (in which interest payments don’t change), rather than a dividend-paying stock (in which value can fluctuate).
Based on the above data on differences in taxes treatment between the US and Canada, the US investors will observe a higher tax bill in this case as compared to Canadian investors. Many analysts argue against dividends based on the belief that a firm that reinvests funds (rather than paying them out as dividends) there will be an increase the value of the firm as a whole and consequently increase the market value of the stock.
Champion may invest in undertaking more projects or acquiring new companies and profitable assets as was seen in them acquiring previous businesses such as soil compactor and Bud Lee Can Champion declare dividends, and if so how much per share (DPS) and total ($ amount)? Champion can definitely declare dividends. Based on the financial numbers (see table 1) Champion has equity available for distribution of $ 6,600,000. 00 and DPS would be equal to $0. 59 The policies of Champions competitors would be also important to shareholders. (See table 3).
- In taking decision on the dividends policy management should also take into consideration the expectations of its shareholders. Champion has three main groups of shareholders:
- Seqouia – a private investment firm. It focuses on high risk opportunities with the potential growth in sales, earnings and cash flows, which would translate into stock appreciation. This group of shareholders could be interested in long-term growth rather then in giving out dividends now.
- Institutional investors (including large Canadian-based money managers & Retail Investors – mainly interested in capital gains rather then in regular dividends payments.
To conclude, the majority of shareholders would prefer to keep the cash in the company for the future investments. Conclusion and Recommendations: Should Champion declare dividends, and if so how much per share (DPS), and the total ($ amount)? We would recommend Champion to have a Regular-dividend-plus-extra policy that will enable them to pay extra dividends in good periods, when profits and cash flow are high and at the same time follow the competitors. For 1994, we recommend Champion to have annual regular dividend (based on the industry average) of $0. 42 and amount available for special dividends would be $1,908,600. 0 with DPS $0. 17.
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Champion Road Machinery. (2016, Sep 27). Retrieved from https://graduateway.com/champion-road-machinery/