Dividend Policy at Fpl Group, Inc.

Question 1 We believe that Ms Stark should not alte dimensionn her testimonial regarding FPL. The HOLD recommendation seems to be the most appropriate. Our appraisal assumes a dividend publish from FPL. However, this dividend cut would be a detailed st prisegic choice rather than one dictated by financing difficulties. Specifically, the dividend cut will raise future growth, with brusque effect on the fund price. By cutting dividends, FPL dissolve react better to future threats. After an initial alarm selling triggered by the peeledfangleds shock (FPL never cut its dividend in the past 47 long time), investors will process the new information realized that the dividend cut is balanced by an change magnitude growth roll in the future. To justify the HOLD recommendation on the stock, we need to figure out what is the necessary annex in the growth rate to compensate a particularised dividend cut. Assuming a risk free rate of 7.5% (30 years Treasury yields in May 1994) and a market agio of 6%, we estimated an expected return on equity for FPL of 11.1%. development a Dividend Discount Model and given the current stock price of $32, we can imply a growth rate of 3.14%. With these estimates, we can have an idea of the necessary growth rate for each dividend cut (as a % of current dividend assumed at $2.47) to sustain a stock price of $32.

The results of this exercise ar in Figure 1. Figure 1 Dividend cut scenario analysis For example, a 25% decrease in dividends would correspond to a new dividend per part of $1.853. In target to sustain a share price of $32, FPL needs to convince investor it can grow dividends at roughly 5% per year. This analysis assumes that the leverage ratio of the bon ton does not change, so that the return on equity system constant. We believe that the likely dividend cut would be in the neighborhood of 20%. Such a cut implies a payout ratio of 72%, putting FPL below the industry average. The implied growth rate of 4.64% seems achievable. During the period from 1984 to 1989 inclusive,... If you want to get a full essay, order it on our website: Ordercustompaper.com

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