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Eastboro Analysis

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Submitted By anamikakumar
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1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock. Which of these three elements is Eastboro management willing to vary, and which elements remain fixed as a matter of policy?

Management is willing to vary their investment (investing less) as well as issue more stock. This is not against their policy. But the management would not be willing to borrow more as their borrowing policy is limited to 40% debt to equity ratio.

2. What happens to Eastboro's financing need and unused debt capacity if
,
a. No dividends are paid?
If no dividend are paid, the company does not need financing required for the dividends. Hence the company’s financing needs decreases. If the company pays 40% dividend, they need to borrow $30 million in 2001 and if no dividend is paid, they only need to borrow $23 million. Hence the unused debt capacity also increases if no dividend is paid.

b. 20 percent payout is pursued?
If 20% dividend payout policy is pursued, the amount needed for dividend would be $3.6 million as opposed to $7 million (with a 40% payout). The company requires less financing and hence the financing needs decreases as opposed to a 40% dividend payout. Also the unused debt capacity would decrease as the company needs to borrow $26.6 million as opposed to $30 million (with a 40% payout).

c. 40 percent payout is pursued?

If 40% dividend policy is pursued, the financing needs of the company would increase, money required to pay dividends would be $7 million . The unused debt capacity will decrease as the company would need to borrow almost $30 Mi.

d. Residual payout policy is pursued?

Eastboro would need cash to implement their strategy moving forward, which includes,
Changing the product mix , moving into international markets, and acquisitions and joint

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