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Questions&HintsCaseStudy#5 DividendPolicyatFPLGroup,Inc.

(A),HBS#295059
FNCE203,Spring2012 ProfessorOpp
InthiscaseyouwillevaluatetheoptimalpayoutpolicyforFPLGroup,Inc.andmakeabuy/sell/hold recommendationforFPLsstockbasedonapossibleforthcomingchangeinthecompanysdividend policy.Asyouknowfromthetheoryofpayoutpolicy,mostofthecosts&benefitsofoptimal payoutpolicycannotbeeasilyquantified.Therefore,inthiscase,muchofyouranalysisofFPLs payoutpolicywillbequalitativeinnature.However,youarestronglyencouragedtogather historicaldataabouttaxrates(i.e.pre1994),etc.tosupplementyouranalysis. TheanalysisofthecaserequiresyoutothinkthroughwhyFPLhasdecidedtomakethischangein dividendpolicy,andwhetherthischangeisgoingtobeintheinterestofshareholders.Informing yourrecommendation,pleasetouchuponallthevarioustheoriesofoptimalpayoutpolicythatwe exploredinthelecture. Inyouranalysis,youshouldaddressthefollowingpoints.(Asalways,yourreportshouldnotbe writtenintheformofanswerstothebelowquestions,butinstead,itshouldbewrittenasa recommendationtothemanager/investorsthattouchesuponallofthebelowkeyissues.Further, itisstronglyrecommendedthatyourreportnotbeconfinedtothebelowissues). 1. BrieflydiscusshowFPLsdividendyieldandpayoutratiocomparestootherfirms;also discussrecenttrendsinFPLsdividendgrowthandpayoutratio. 2. DoesFPLsrecentpayoutpolicyappeardrivenbyanyofthetheoriesweknowof? 3. ExplorehoweasilyFPLcouldmeetfuturedividendpaymentsoutofitscashflows. o HowvulnerableisFPLtorecentchangesintheutilityindustry? o Whatwouldhappenifdividendswereheldconstantorgrewmoreslowlyat1%? 4. Usingourdiscussiononoptimaldividendpolicy,thinkabouthowachange(i.e.acutor zerogrowth)individendsmightaffectshareholdervalue.Trytomakesureyoutouch uponallthedifferenttheoriesaboutwhydividendsmaymatter. o Howmightthemarketviewsuchachange? o Whymightachangeindividendsincreasefirmvalue? o Whymightachangeindividendsreducefirmvalue? 5. Givenyouranalysis,wouldyourecommendabuy,sell,orholdforFPLsstock?Explain.

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