S&P cut sbhp billiton out look to negative over dividend Cash Flows train Harvard Case Solution & Analysis

ANSWER TO QUESTION # 1

The managers of the company use dividend policies to convey information to the market place of instead of using press release. This is because the managers of the company believe that conveying information through dividend policies would attract more investors towards the company as well as the company may effectively communicate the facts and figures to the recipients.

Moreover, the company has a margin to do bear trap and travesty in its dividend policy in order to attract investors as compared to the press release. The company cannot manipulate information or create loopholes in order to attract investors if it conveys the information in the market place through press release.

ANSWER TO QUESTION # 2

This statement depicts that the company pays high dividends to its shareholders even when the company is facing cash flow problems. The cash flow of the company is not enough that the company could pay the desired return to its shareholders.

If the company pays the desired return to its shareholders the company will run short on cash and the company will have to take debts in order to finance the operations of the company efficiently and effectively. This will increase the debt ratio of the company because most of the operations of the company will be financed through debts.

Thus, it will create a negative impact on the cash flow leverage measures as the cash flow of the company will be negative and the company will be highly dependent on the debts procured by the company.

ANSWER TO QUESTION # 3

The statement that “It wouldn’t surprise me if they accepted a credit downgrade instead of cutting dividend” depicts that the management of the company is seriously concerned for the dividend pattern. The company has a policy of paying off progressive dividend to its shareholders.

This dividend policy is maintained to earn the confidence of the shareholders of the company as well as the company has maintained this policy in order to attract the prospective and potential investors in the market.

The statement also depicts that the company can afford a credit downgrade but it could not afford cutting dividend of its shareholders. This also depicts the philosophy or strategy of the company that company believes that it would be profitable for the company in the long run if it maintains good relations with its shareholders and provide them high returns on their investment in order to please them.

Moreover it would help the company in attracting more investors towards the company which will subsequently enhance the market share of the company as well which will support the sustainability of the company in the long run.Because of the above following reasons the company has focused and maintained its dividend policy so efficiently that it cannot afford any compromise in paying out dividends to its shareholders.

ANSWER TO QUESTION # 4

The payout policy of the company changes with the different phases in the life cycle of the company. The life cycle of the company has different phases. In the first phase of the life cycle of the company the company is in a development phase. The profits in this phase are low or the usually in this phase of life cycle the company is at the break even point, but they are gradually at an increasing rate.

The company, in this phase usually give nominal returns on the investment to the shareholders as the company needs more cash to enhance the growth of the company as well as it also needs to pay dividends in order to gather support of its shareholders in the development of the company.

In the second phase of the life cycle of the company. The company is at the boom phase. The company is performing at its optimal and generating optimal profits. In this phase the company gives high returns on investment to its shareholders because the company is generating huge profits in this phase as well as the stock price of the company is also high in this phase. Moreover, the company also has large cash reserves in this phase which allows the company to pay high dividends to its shareholders............................

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