Free Accounting Dissertations - Equity Financing Is Much More Costlier Than Debt Financing, Especially When
Equity financing is much more costlier than debt financing, especially when company debt levels are no where near bankruptcy. Hays could use more debt at a lower cost and return the costlier capital to shareholders. The company had higher debts in 2003. But it sold some businesses in 2004 and used the cash to retire almost all of debt.
Returning capital to shareholder by taking more debt would decrease shareholders funds and increase interest costs. Higher interest costs would reduce tax costs, reducing net interest costs. But the consequent decrease in shareholders funds mean that the returns on capital will increase significantly.
2.a Earnings per share
Appendix 3 gives the earnings per share in the last five years. Only once in the last five years did basic earnings per share increase. Over the five year period, basic earnings per share have dropped by 50 %.
From 2000 to 2002, basic earnings per share decreased gradually from 7.7p to 4.82p. Then it drops significantly to -28.39p. This is mainly due to a very high exceptional charge of £490m. Exceptional charge relates to goodwill written off from acquired businesses of £442.8m and restructuring charges of £47.2m.
Appendix 3 also shows earnings per share before goodwill amortisation and exceptional items. This is a better reflection of earnings as goodwill amortisation is a non-cash charge. Earnings per share before goodwill amortisation and exceptional items also declines over the five year period but the fluctuations in it are much less than in basic earnings per share. While basic earnings per share was hugely negative in one year, earnings before goodwill amortisation and exceptional items were positive in all five years.
2.b Five year dividend policy
In the five year period from 2000 to 2004, dividend increases in the first three years and decreases only in the last year. In the first three years from 2001 to 2003, dividend increase each year by 15%. Only in the last year, dividend decreased by 44 %.
The constant 15 % rise in the first three years of five year period is not consistent with the pattern observed in basic earnings per share, which have declined in all three years. In 2003, basic earnings per share was negative but dividend still increased to 5.38 p.
The contrast growth pattern observed above is also seen when we use earnings before goodwill amortisation and exceptional items. But dividend is still less than earnings before goodwill amortisation.
Companies normally have a dividend policy and most of the companies follow a constant increase policy. Security markets like companies with less uncertainty. By adopting a constant dividend growth policy, companies want to convey the message that business is going well and take this opportunity to assure investors. Hays has also followed this constant growth or progressive dividend policy as stated in its 2004 annual report.
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