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Dividen Policy Fpl

In: Business and Management

Submitted By koshout
Words 1039
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Group Assignment 4
Dividend Policy at FPL Group, Inc. 1. Why do firms pay dividend? What, in general, are the advantages and disadvantages of paying cash dividends?
The sole purpose of dividends per se is to return wealth back to the shareholders of a company. Shareholders take risk and invest in company and the dividends are rewards for commitment, trust and risk-taking. Dividends transfer economic value from the company to the shareholders instead of the company using the money for operations. Often in case of more established and mature companies that are growing more slowly they are not “hungry” for cash and to reward the shareholders by sharing the wealth those companies pay dividends. Similarly paying dividends often is a sign of sound business model and stability of company at large. Both paying and not paying dividends and cash dividends have their own respective pros and cons as presented below:
Advantages:
1. Dividends may appeal to investors who desire stable cash flow but do not want to incur the transaction costs from periodically selling shares of stock.
2. Behavioral finance argues that investors with limited self-control can meet current consumption needs with high dividend stocks while adhering to the policy of never dipping into principal.
3. Managers, acting on behalf of stockholders, can pay dividends in order to keep cash from bondholders.
4. The board of directors, acting on behalf of stockholders, can use dividends to reduce the cash available to spendthrift managers.
5. Managers may increase dividends to signal their optimism concerning future cash flow.
Disadvantages:
1. Dividends have been traditionally taxed as ordinary income.
2. Dividends can reduce internal sources of financing. Dividends may force the firm to forgo positive NPV projects or to rely on costly external equity financing.
3. Once established, dividend cuts...

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Dividen Policy at Fpl

...Dividend Policy at FPL 1. What are the major uses and sources of funds for FPL? • Major Uses – Operating expenses – Capital and nuclear fuel expenditures o In 1994, FPL budgeted $6.6 billion in expansion cap ex over the next five years in order to meet projected demand. Projects included building a new transmission line, refurbishing the oldest generating plant, improving operating efficiency at all plants, and buying a majority share in a coal burning plant owned by The Southern Company – Retirement of long-term debt and preferred stock – Dividends on Common Stock – Acquisitions o From 1985 to 1988, FPL attempted to diversify into higher growth businesses and made four major acquisitions (Colonial Penn Life Insurance, CBR Information Group and Turner Foods Corp) as well as established a real estate development subsidiary (Alandco) and an alternative energy development subsidiary (ESI Energy) • Major Sources – Operating revenues – Divestitures of non core operations o In 1991, FPL sold Colonial Penn o In addition, FPL was trying to sell Telesat Cablevision and Alandco – Issuance of FPL debt, common and preferred stock What is the industry structure and business risk? • Electric Utilities Industry Structure – Regulated industry historically dominated by monopolies and vertically integrated suppliers – Beginning in 1978, deregulation has been weakening the......

Words: 1038 - Pages: 5