The major purpose of each firm is to enhance the shareholders worth and the owner’s value. Normally this value could be analyzed through the prices of shares of the company. Barman (2008) has explained that dividend is recognized as the main gauge of company’s share price and as dividends is known as main gauge of firm worth so it should improve the shareholder wealth. Whenever a corporation makes the profit, company either could retain the profits to expand the business further or pay the profit to the shareholders in terms of dividend.
In the given case, director’s argument has been analyzed and for suggesting them the best policy, dividend policies has been studied. Dividend policies submit to the system which is followed by the company to make a decision that how much amount of dividends must be give to shareholders. Mainly this dividend amount decision is taken by the BOD and one time this decision has been made than the dividend sum becomes the company’s debt. Zhang (2012) depict that dividend amount makes a force over investor’s decision. Investors take decision according to dividend amount.
This report has been prepared to analyze about the importance of dividend policy as it helps the investors to take decisions about the investment. More, the relevant and irrelevant, theories have been investigated to reach on a conclusion about the director argument.
Dividend theories are of 2 types. Out of those, one theory explains that the firm value get affected due to dividends and another one depicts that dividend doesn’t make an impact over firm’s value.
Earlier, it has been accepted by every person that dividend amount enhances the organization’s value. Then Miller and Modigliani (1961) has came with a publication and depicted that dividends cannot decide the firm’s value. Allen and Michealy (1995) and Earlier Gorden (1959) have argued that requisite rate of return will enhance with retained earnings growth in a company. The M-M model depict that this theory is not helpful and explained the dividend policy framework.
This M-M model has described the users about dividend policy effect over a business and its share price. It has been analyzed that the dividend policy would not get affected in a perfect capital market (DEEPTEE and ROSHAN, 2009). Basically, they have said that firm value could only be determined through current and future cash flow of firm. They have even said that every time an investor needs more money, they must sell the shares to create the cash.
This dividend theory depict that the dividend amount makes a force over value of the firm. This speculation of dividend policies is relevant. This theory depicts that in the market value of a share fluctuation is normal and dividends also get affected due to it. This theory explains that cost of capital and rate of return is connected to each other and dividend payout policy makes an influence over the firm’s value.
This theory supposes that company do not elevate any finance through debt, equity stock is the only source to raise the funds for the company, the cost of capital of the firm and IRR is stable, taxes could also not be taken into considered, a similarity into retention rate, cost of capital of the firm is evermore superior than the development rate and continuous theory of earning has also taken into consideration.
Formula of this relevant theory is below:
P = {EPS * (1-b)} / (k-g)
Case explanation and Conclusion:
This report paper has been investigated to inspect the dividend policies and the arguments of alpha plc’s directors. In the given case, it has been found that Director A is forcing the company to pay higher dividend to its shareholders so that investors get attracted towards to the company on the basis of dividends as this would enhance the dividend payout ratio of alpha plc. Further, director B has argued that dividends do not make an impact over the shareholder wealth. Shareholder wealth depends over many other factors.
More, director C has argued that dividends must not be offered to the shareholders as dividends are the main reason behind decrement in the shareholder wealth of the company. It has been analyzed that all the arguments are quite strong. These arguments totally depend upon the relevant and an irrelevant theory that depicts that dividend is significant for administrations to administer the firm’s value, share’s marketplace worth and retained earnings. It could be said after this study that both the dividend speculations have separate importance among the administration and shareholder from divergent interest.
The relevant theory has been studied and concluded that value of alpha plc and dividend payout has a positive connection. The investors take a decision regarding investment throughout analyzing the dividend price of alpha plc. Hence the analyst reviews the firm’s value by carrying out a research upon the payout ratio of dividend and dividend policies. Thus it could be depicted that alpha plc is obligated to take the argument of Director A into consideration. The payout ratio of dividend attracts the investors more and the approach of M-M is not relevant in alpha plc.
easyJet plc is a UK-based company which is a low-cost airline. The corporation functions in short-haul airline as point-to-point. This Company functions throughout its way network section. This Company functions over 820 routes athwart and in approx 30 countries with its convoy of 250 Airbus aircrafts. Corporation’s total aircrafts fleet has spited between 180-seat A320s, 186-seat A320s and 156-seat Airbus A319s. It has also focused over the operations of its fleet of A320 neo aircrafts. Company’s base includes the UK, Switzerland, Italy, Barcelona Venice, France, Amsterdam etc. this company has its functions in the airports like Milan Malpensa, Gatwick, Nice, , Venice Marco Polo, Naples, Basel, Edinburgh and Geneva. EasyJet offers a mobile app-only scheme to target customers which are craving to change journeys at a short notice on travel date and it also offers in-flight vouchers which are pre-purchased.
It explains about the company’s competence and technique to funding the entire functions and development by using numerous causes. Capital structure of easyJet Plc has been considered to evaluate the entire competence of the corporation. This report has chiefly prepared to examine the situation of the firm in industry. For investigating over the capital structure of easyJet, below points have been studied:
Business risk is connected with the possibility of an organization through which the level of profit could be reduced. It is prejudiced by opposition, per unit price, input cost, government regulations and sales volume. This business risk is correlated with the income variances in easyJet plc.
easyJet plc’s financial statement explains that financial leverage is 2.03 of the company in 2016, operating leverage is 1.8 of the company in 2016 and total effect over the easyJet is 3.654 in 2016 of the company. Both of the ratios are quite inferior to the ratios of 2015 (Annual Reports, 2016). Company’s financial leverage has been reduced from 2.15 to 2.03. The company’s operating income has been reduced from 688 to 498 in the company. The grounds after such deductions are business risk like high currency volatility, economy breakdown in UK, less industry share.
The finance risk is connected with the financial risk that contains monetary transaction like default risk. Often it has been included to recognize the shortcoming risk. It has been investigated throughout the concluding easyJet financial report that debt of long term of easyJet has been improved in 2016 since 228,000,000 to 561,000,000 at the same time, the total assets of the firm has also enhanced from 4,828,000,000 to 5,505,000,000 (Annual Reports, 2016). The EBT of easyJet has been decreased from 14.64% to 10.60%. The finance expense of company has also been enhanced from 11,000,000 to 13,000,000. Thus it could be depicted that company is concerning huge finance risk in the market. Entire liabilities and assets of the company are increasing rapidly but the increase rate of assets is quite lower than liabilities.
The main reasons behind the finance risk of easyJet are less investment in airline industry, economic breakdown in UK, currency volatility etc. easyJet plc is still performing better than other firms in the marketplace (morning star, 2017). Still by analyzing the external and internal factor of the company, it has been analyzed that company could face much financial risk in future.
It is a dimension of much subject matter. It calculates about the firm’s potential to utilize its assets for expanding and generating the income and the activities of the company. Financial performance has been investigated on the base of final financial reports of the company. The main reason of financial concert study is to recognize the monetary feature of a corporation.
Currently, company has extended its market share and made investments in some new projects. But because of few problems in the business and state, firm has earned less income in comparison of last year. The short term and long term liabilities of firm has been enhanced. The company’s speculation has been enhanced from 128 to 268, company’s asset (long term) has also been enhanced from 96.45 to 95.91. This depicts that corporation is unmoving waiting for the market situation to get change into good condition so that the market could be expanded and company could invest into new project and market.
Further, it has been studied through company’s annual reports that the company’s worth has been reduced from last year. The reduction makes an impact above the whole monetary performance of easyJet. Firm has lifted the funds throughout many external sources to convene requirements of easyJet and lope the functions. Company’s current ratio has been enlarged to 0.92, the quick ratio to .69 and the financial leverage has been reduced to 2.03 and debt to equity has been enhanced to .24. This depicts that company has decreased the EBIT and the total debts of easyJet has been enhanced (Brealey, Myers and Marcus, 2007).
The functions of easyJet are running smoothly in such circumstances also. The operating margin of easyJet has been reduced from 349.1 to 238.3. The payout ratio of the company has been increased from 14.7 to 10.7 (Davies and Crawford, 2011). Reason behind such reductions in the company’s financial performance is volatility in currency, weaker economic growth, global financial risk, capital fight, capital fluctuation, yield, high guild etc.
It refers to an opinion of total amount possessed by easyJet that is needed to pay after a particular period of time. Usually, it is measured to identify the aptitude of the company to scrounge. This aids analysts to study the borrowing state of the company.
Debt capacity of easyJet has been diminished from last year because of volatility in currency, weaker economic growth, capital fight, global financial risk, capital fluctuation, yield, high guild etc. currently, the financial condition of easyJet is not quite strong. Company is not in a situation to pay debentures interest. Still company has managed to increase the debt capital of the company from 266 to 288 (CORREIA et al.2013). The debt equity ratio of the company has been increased from 14% to 24%. Short term debt of the company has been decreased from 88 to 84.
The debt capacity of easyJet is quite strong because company has managed the short and long term debt according to the market. Still some financial risks had been faced by the company. Due to increment in the debt liability, the profitability of the company has been lesser (Sherman, 2005). This less profitability directly affects the investors. The dividend rate is getting lesser and investors are getting demotivated because of it. So it has been suggested to the company to not to raise more funds through debts (Hillier, Grinblatt and Titman, 2011).
There are huge sources to raise the funds like debt, long term loans, debentures, equity, , retained earnings, short term loans, venture funding etc. Every source has some different cons and pros and also used by the companies according to the situation. easyJet uses huge sources to lift the funds. Some of them are as below:
This is one of chief basis of funding in every plc company. EasyJet plc uses this basis of finance, the most. At present the share capital of business is 2712 which has been enhanced from 2015 i.e. 2219 (Tucker, 2011). Share’s costs are less than other sources in the company, so company must use this basis the majorly for raising the funds.
Debt has also been considered by the corporation on a vast level to lift the funds. The Kd (cost of debt) is quite higher than the Ke (cost of equity). Previously, debt of the company was $ 266 million but in 2016 company has enhanced it to $ 284 million (Atrill and McLaney, 2006). The Kd is quite higher than Ke.
Short term debt has been used by the corporation to meet the short term obligation. Earlier, company had 84 of short term debt but in 2016, it has been enhanced by 88. Company has condensed the processes and that’s why the obligation of fund has also been enhanced for a while (Glynn, 1993).
This is one of the huge sources of finance for every plc. EasyJet has also used this source to lift the funds. This is less risky source than other sources.
This is the enormous source of funding for every new plc and recognized plc. EasyJet also make uses of this basis to lift the finances (FIRER et al. 2012). It is fewer dangerous because of some contracts and policies among the institutes and company.
It is also used by the corporation to convene the short term obligation. Company has condensed the functions and that is why the obligation of fund has been less.
Commercial paper has also been used by the corporation to accomplish the short term obligation. This assists the corporation to reduce the trade and financial risk and aid the company to convene the goals.
Recommendation & Conclusion:
Optimal capital mix depicts a relationship among debt and equity of a firm which enhances the firm value. In this study, it has been analyzed that the state of easyJet is not fine enough. The capital mix of easyJet is in a condition where the financial risk is high. Consequently, investors return is also quite low. Such issues have been faced by easyJet due to numerous external aspects which is the main reason behind decreasing the market.
Although it could be suggested to the easyJet that company should focus over the diverse markets to increase the business and it should preserve the financial constancy by lifting the funds throughout equity capital. Company has operated its business on a very downy level but because of some external issues, easyJet has failed to manage the performance of in 2016. The investors have found that if amount would be invest in the easyJet plc than the level of risk would be higher and level of return would be lower. So the corporation has involved into some strong decisions to decrease the sufferers such as decrement in the investments, reduction in debt capital.
It has been recommended to easyJet to make an ideal optimal capital formation by decreasing some borrowings and it is also suggested to take some strong rules to stand by all the risk and enhance the business. Company might reduce the loan and improve the funds by equity to deduct the risk level. The company’s growth could be enhanced by expanding the marketplace to coat entire risk. The company’s management is quite strong and the company’s vision also helps the company to uphold the operations and performance very well.
Though, it is suggested to easyJet to reduce the debt level and improve the equity level to decrease the risk and improve the company’s operations. The company’s financial manager must look over the scope of debt and equity in a manner through which the financial risk could be inferior. Company should set the debt equity amount according to the market and industry so that share price could also be at maximum.
Thus through the above study it could be said that easyJet is among the largest airline companies in the country. Still because of global monetary disaster the economic presentation of the corporation, it has been reduced. It has also conventional through this learning that corporation has taken many sturdy stepladder to run the economic recital.
References:
Annual Reports (2016). Retrieved as on 12 July 2017 from https://corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/investors/result-center-investor/annual-report-2016.pdf
Home. (2017). easyJet. Retrieved as on 12 July 2017 from https://www.easyjet.com/en
Annual Reports. 2015. Retrieved as on 12 July 2017 from https://corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/investors/result-center-investor/annual-report-2015.pdf
Atrill, P. and McLaney, E.J., 2006. Accounting and Finance for Non-specialists. Pearson Education.
Allen, F. and Michaely, R., 1995. Dividend policy. Handbooks in operations research and management science, 9, pp.793-837.
Black, F. and Scholes, M. 1974. The effects of dividend and dividend policy on common stock price and returns. Journal of financial economics.
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw Hill, New York.
CORREIA, C. et al. 2013. Financial Management. 7th Edition. Cape Town: Juta andCompany Ltd.2.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
DEEPTEE, P. and ROSHAN, B. 2009. Signaling Power of Dividends on firms futureProfits A Literature Review. Evergreen Energy- Interdisciplinary Journal, pp.1-9.
easyJet. 2017. Retrieved as on 12 July 2017 from https://www.easyJet.com/
FIRER, C. et al. 2012. Fundamentals of Corporate Finance. 5th Edition.Berkshire.McGraw-Hill Companies, Inc.
Fisher. 1961. Fundamentals of Corporate Finance. 5th Edition.Berkshire.McGraw-Hill Companies, Inc.
Glynn, J.J., 1993. Public sector financial control and accounting.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.
Miller, M. and Modigliani, F. 1961. Dividend policy, growth and the valuation of shares. Chcago Journals, Vol 4.p.p. 411-433
Morning star. 2017. Retrieved as on 12 July 2017 2017 from https://financials.morningstar.com/income-statement/is.html?t=EZJ®ion=gbr&culture=en-US
Barman, G.P., 2008. An evaluation of how dividend policies impact on the share value of selected companies.
Morning star. 2017. Retrieved as on 12 July 2017 from https://financials.morningstar.com/ratios/r.html?t=EZJ®ion=gbr&culture=en-US
Sherman, S., 2005. Finance and fictionality in the early eighteenth century: Accounting for Defoe. Cambridge University Press.
STEEN, E. et al. 2012. stakeholder conflicts and dividend policy. Journal of Banking & Finance, 36 pp. 2852-2864
Tucker, J.W., 2011. Selection bias and econometric remedies in accounting and finance research.
Gordon, M.J., 1959. Dividends, earnings, and stock prices. The review of economics and statistics, pp.99-105.
Zhang, D., 2012. Managerial dividend-paying incentives. Erasmus University Rotterdam.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download