Georgia Atlantic Company Essay

During the first of the 1930s, Ben Jenkins, Sr., a wealthy, expansion-oriented musical noneman whose family had been in the baseball bat business in the s surfaceheastern coupled States for several generations, began to acquire small, de squelched sawmills and whole sales til nowt lumber companies. These businesses prospered during World War II. aft(prenominal)wards the war, Jenkins anticipated that the demand for lumber would surge, so he aggressively sought revolutionary lumbers to furnish his sawmills. In 1954, all of Jenkinss companies were consoli dated, a want with near other self-directed lumber and milling companies, into a hotshot corporation, the gallium Atlantic Comp both.By the eat up of 1992, gallium Atlantic was a study force in the lumber manufacturing, though non angiotensin-converting enzyme of the giants. Still, it possessed more than pure tone and timberlands in relation to its engagement of timber than any(prenominal) other lumber fami ly. Worldwide demand for lumber was salubrious in spite of a low-keyed world economy, and its timber supply should return put tabun Atlantic in a good touch. With its assured supply of pulpwood, the alliance could run its mills at a steady rate and, thus, at a low per-unit production cost. However, the follow does not have sufficient manufacturing talent to fully utilize its timber supplies so it has been forced to sell raw timber to other lumber companies to generate bullion flow, losing potential profits in the process.Georgia Atlantic has enjoyed rapid developing in both sales and assets. This rapid growth has, however, ca utilize nearly financial problems as indicated in Table 1. The condensed equilibrium rag weeks shown in the panel reveal that Georgia Atlantics financial leverage has increased advantageously in the last 10 years, go the hards liquidity government agency markedly deteriorated over the same period. Remember, though, that the dimension sheet figures reflect historical costs, and that the trade ranks of the assets could be much higher(prenominal) than the values shown on the balance sheet.For example, Georgia Atlantic purchased 10,000 acres of cut timberland in southern Georgia in 1961 for $10 per acre, then planted trees which atomic number 18 now mature. The value ofthis acreage and its timber is estimated at $2,750 per acre, even though it is shown on the pixilateds balance sheet at $230 per acre, the original $10 add-on chief cityized planting costs. Note also that this limited asset and others wish it have produced zero in report income indeed, expenses associated with this acreage have produced accounting losses.When Georgia Atlantic was originally organized, nearly of the outstanding downslope was possess by the senior Jenkins and members of his family. Over time, however, the familys possession position has gradually declined receivable to the sale of new super C agate line to broth expansion. In 1987, Ben Jenkins, Sr. died the presidency of the self-colored was passed to his son, Ben Jenkins, Jr., who was 61 at the time. By the give the sack of 1992, the Jenkins family held only about 35 portion of Georgia Atlantics common depot, and this represented essentially their entire sugar worth.The family has sought to finance the menages growth with internally generated funds to the superlative extent possible. Hence, Georgia Atlantic has never proclaimed a bullion dividend, nor has it had a stock dividend or a stock get out. Due to the plowback of lettuce, the stock onlinely sells for c bear to $2,000 per dowery. The family has stated a strong opinion that investors prefer low- giveout stocks because of their revenue enhancement advantages, and they also intend that stock dividends and stock reveals serve no useful purposethey merely make water more pieces of paper only no incremental value for sh atomic number 18holders.Finally, the family feels that higher- equipment casualtyd stocks are more attractive to investors because the percentage brokerage commissions on small purchases of higher- damaged stocks are lower than on large purchases of lower- termsd shares. They cite the example of Berkshire-Hathaway, whose stock price has risen phenomenally even though it now sells for over $15,000 per share and expects no dividends. (The family does acknowledge, though, that Warren Buffett, Berkshires chairman, has make a superb job of managing the companys assets, and that the rise of its stock price reflects that factor as head as Buffetts financial policies.)As the date for Georgia Atlantics annual stockholders meeting approached, Mary Goalshen, the corporate secretary, conscious Ben Jenkins, Jr., who is commonly called next-to-last at the company, that an unmistakably low number of shareholders had sent in their proxies. Goalshen felt that this might be out-of-pocket to rising discontent over the degradeds dividend policy. During th e last two years, the fair(a) payout for firms in the paper and forest products application has been about 35 percent yet for the 58th straight year, Georgia Atlantics board, under the Jenkins familys dominance, chose not to pay a dividend in 1992.The Jenkins family was also awake(predicate) that several reports in the financial press in new-fashioned months indicated that Georgia Atlantic was a possible target of a takeover attempt. Since the family did not sine qua non to lose control of the company, they were anxious to keep the firms stockholders as happy as possible. Accordingly, younger announced that the directors would hold a especial(a) meeting immediately after the annual meeting to consider whether the firms dividend policy should be changed.Junior instructed Abe Markowitz, Georgia Atlantics financial vice president, to identify and then assess alternative dividend policies in preparation for the special board meeting. He asked Markowitz to consider hard cash div idends, stock dividends, and stock splits. Markowitz then place six proposals that he persuasion deserve further consideration(1) No notes Dividends, No telephone circuit Dividend or Split. This was the position Markowitz was certain that Junior and the family would support, both for the reasons minded(p) above and also because he thinking the company, as evidenced by the balance sheet, was in no position to pay cash dividends.(2) Immediate money Dividend, but No deport Dividend or Split. This was barely the opposite of the no dividend policy. If a cash dividend policy were instituted, its size would still be an issue.(3) Immediate Cash Dividend plus a Large Stock Split. The stock split would be designed to lower the price of the firms stock from its current price of almost $2,000 per share to somewhere in the average price picture of other large forest products stocks, or from $20 to $40 per share.(4) Immediate Cash Dividend plus a Large Stock Dividend. The reasoning und erlying this policy would be essentially the same as that of ersatz 3.(5) Cash Dividend, Stock Split, and Periodic Stock Dividends. This policy would require the company to declare an immediate cash dividend and, simultaneously, to announce a sizable stock split. This policy would go further than Alternatives 3 and 4 in that, after the cash dividend and stock split or large stock dividend, the company would periodically declare smaller stock dividends equal in value to the earnings bear during the period. In effect, if the firm make $3 per share in any given period-quarter, semi-annual period, and so onand retained $1.50 per share, the company would also declare a stock dividend of a percentage quantity equal to $1.50 divided by the market place price of the stock. Thus, if the firms shares were change for $30 when the cash dividend was paid, a 5 percent stock dividend would be declared.(6) care Repurchase Plan. This plan is based on the premise that investors in the aggregat e would like to see the company distribute some cash, but that some stockholders would not want to receive cash dividends because they want to belittle their taxes. Under the repurchase plan, individual stockholders could dissolve for themselves whether or not to sell some or all of their hares and thus to empathise some cash and some capital gains, depending on their own situations.To begin his evaluation, Markowitz self-possessed the data shown in Tables 2 and 3. As he was looking over these figures, Markowitz wondered what effect, if any, Georgia Atlantics dividend policy had on the companys stock price as compared to the prices of other stocks. Markowitz is also certain of one other issue, but it is one that neither he nor anyone else has had the nerve to add up up. Junior is now 66 years old, which is hardly ancient but he is in poor health, and in recent years he has been almost ghost with the idea of avoiding taxes.Further, the federal kingdom tax rate is currently 60 percent, and supererogatory state commonwealth taxes would be due so well over fractional of Juniors net worth as of the date of his death forget have to be paid out in acres taxes. Since estate taxes are based on the value of the estate on the date of death, to minimize his estates taxes, Junior might not want the value of the company to be maximized until after his death. Markowitz does not know Juniors view of this, but he does know that his tax advisors have thought it through and have explained it to him.Finally, Markowitz knows that several mole Street firms have been analyzing Georgia Atlantics separation value, or the value of the company if it were broken up and interchange in pieces. He has heard breakup value estimates as high as $3,500 per share, primarily because other lumber companies, including Japanese and European companies, are eager to barter for prime properties such as those owned by Georgia Atlantic. Of course, Georgia Atlantic could sell assets on its own, but Markowitz does not expect that to happen as long as Junior is in control. instanter assume that you are an outside consultant and have been hired by Abe Markowitz to economic aid him with the analysis and make a founding to the executive committee. First, Abe is not sure whether an announced dividend policy is a good idea. He believes an announced policy could cause the firm to feel forced to take actions that other would be undesirable. He has also convey concern about signaling and commercial enterprise effects. As old man Jenkins used to say, If it aint broke, dont fix it.Thus, analyze the firms present dividend policy to determine how well the company has performed compared to other firms in the industry before discussing the implications of the alternative dividend policies and making a recommendation. Markowitz also wants you to discuss whether the firms historical rate of return on investment has been affected by its dividend policy, the estate tax issue, and the takeover issue.Junior is famed for asking tough questions and then crucifying the somebody being questioned if he or she has issue responding. That is probably why Markowitz wants you to make the presentation. So be sure that you thoroughly find out the issues and your answers so that you can handle any follow-up questions that you might receive.