Champion Machinery Road Limited Case Study Solution
- Key player/decision maker
The key player during the decision process is Scott Hall who is the vice-president of finance and chief financial officer (CFO) of Champion Road Machinery Limited. He has to make the decision about the dividend policy of the company. Currently, company has the policy of not paying the dividend. Hall has to analyze the position of the company in relation to dividend.
- Key issues at hand
As a CFO, Hall has to analyze the importance of dividend policy for Champion Machinery and its importance in imperfect market. Along with this, he has to analyze the position of Champion Machinery that either the company can afford to pay dividend or not. Furthermore, he has to work on the reasonable and affordable dividend which can be paid by Champion Machinery.
- What is the problem/dilemma/situation?
Champion Machinery did not pay any dividend and in result they are afraid with the adverse movement in stock price. Due to non-payment of dividend there is a risk that shareholders’ confidence will shake and hence they will sale out their holding and in result the share price will be affected. The other problem relates to the size of dividend. Champion Machinery intends to pay a reasonable and affordable dividend but they are not sure about how much reasonable and affordable is?
- How Important/urgent?
The above identified issues are very important because if shareholders lose their confidence. Then the share price of the company’s share will deteriorate and in result the overall value of the company will be affected. Thus company will have to face many problems. The size of dividend is also an important issue because if company pays high dividends then it has to face many problems like financing of its daily expenses and funding for future growths.
- Objective of analysis
- Solve problem
The problems analyzed above have been solved by analyzing the importance of dividend policy for Champion Machinery and by discussing the importance of dividend policy in imperfect market. Along with the position of Champion Machinery in offering dividend, the dividend should be proposed so that the growth of the company cannot be jeopardized.
- Recommendation Course of action
After analyzing the complete situation we conclude that the company is in the position of paying dividend. Therefore, it should pay dividend so that shareholders’ confidence can be enhanced.
- Proposed opportunity
After paying the dividend, the share price of the company will improve and the confidence of the shareholders will increase and in result company can attract new investors. Furthermore, this will help the company in strengthening its competitive position.
- Analysis and Findings
In the report we analyze the importance of dividend policy for the Champion Machinery by comparing its performance with the competitors and by analyzing the effect on the dividend of the company. Furthermore, we analyze the importance of dividend policy in the absence of perfect market by comparing the importance of dividend policy in perfect market. Then we analyze the position of the company that either it can afford the dividend payment or not by analyzing the ratios. At last, we use free cash flow to equity method to determine the reasonable and affordable dividend which can be paid by the company.
- Final recommendation
At the end of the report, we recommend Champion Machinery that what should it do. In conclusion we recommended that company should pay dividend to its Canadian shareholders as the effective tax rate on cash dividend is low in Canada.
Problem Statement
Champion Machinery has a concern about the dividend. Company intends to expand its business therefore, they introduced the policy not to pay dividend. But meanwhile they feel some fear about the shareholders’ confidence because of competitors who pay continuous dividend. Hence company needs to know about the importance of dividend and about its position in relation to dividend payment and amount of dividend.
Importance of Dividend for Champion Machinery
Investors invest in the stock due to two main reasons either they intend short-term growth in the form of dividend or long-term growth in the form of capital appreciation. Normally,institutional investors are keen for capital appreciation. The shareholder composition of Champion Road Machinery Limited (Champion Machinery) is 70% institutional shareholders and 30% retail industry. The shareholders from retail industry have short-term goals and hence need a good cash dividend. Although they are the minority of shareholders but there is a fear that the share price of the company’s share will be depressed if any of the shareholders sold itsshare. Therefore, to maintain share price, company should pay dividend. Furthermore, cash dividend increases the confidence of shareholders.Currently, the main competitors of Champion Machinery TSE 300, Toronto 35 and others have good dividend policies, they have well maintained the dividend yield ratio. So there is a risk that current shareholders will move towards them and in result Champion Machinery would suffer. Along with this, there are eligibility rules according to which any new listed company has to pay dividend for a number of years (typically 5 to 7 years). Eligibility criteria isdetermined through analyzing various statutes. A stock is eligible if any of the statutes is applicable on it as many of the statutes from the list are applicable on the stock of Champion Machinery therefore, it has to pay dividend........................
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