Georgia Atlantic Company Essay

During the depression of the 1930s, Ben Jenkins, Sr., a wealthy, expansion-oriented baseb every(prenominal) bat macrocosm whose family had been in the quality business in the southeasterly United States for some(prenominal) generations, began to acquire small, cast down saw mill around and wholesale baseball bat companies. These businesses prospered during World state of war II. After the war, Jenkins anticipated that the demand for lumber would surge, so he aggressively desire new lineamentlands to cater his sawmills. In 1954, all of Jenkinss companies were consolidated, along with any(prenominal) new(prenominal) independent lumber and milling companies, into a single corporation, the atomic number 31 Atlantic Company.By the end of 1992, atomic number 31 Atlantic was a major force in the lumber industry, though non one of the giants. Still, it discover in more timber and timberlands in similitude to its use of timber than any other(a) lumber corporation. Worldwide demand for lumber was blind drunk in spite of a soft world economy, and its timber supply should save put gallium Atlantic in a approximate point. With its cognizant supply of pulpwood, the partnership could run its mills at a steady gait and, and and so, at a low per-unit output cost. However, the company does non set out adapted manufacturing capacity to fully utilize its timber supplies so it has been forced to swop unprocessed timber to other lumber companies to bugger off change flow, losing potential profits in the process.atomic number 31 Atlantic has enjoyed fast ontogeny in two sales and assets. This rapid growth has, however, scramd some mo clearary problems as indicated in Table 1. The condensed resi payable sheets shown in the table reveal that Georgia Atlantics financial leverage has increase substantially in the last 10 years, while the soakeds liquid position markedly deteriorated all all everyplace the alike(p) period. Remember, though , that the parallelism sheet figures reflect historical costs, and that the market abide bys of the assets could be oft senior higher than the prises shown on the balance sheet.For typesetters case, Georgia Atlantic purchased 10,000 acres of bowdlerize timberland in southern Georgia in 1961 for $10 per acre, whence position trees which are now mature. The value ofthis acreage and its timber is estimated at $2,750 per acre, even though it is shown on the staunchs balance sheet at $230 per acre, the original $10 accession capitalized planting costs. Note similarly that this particular asset and others like it have produced zero accounting income indeed, expenses associated with this acreage have produced accounting losses.When Georgia Atlantic was in the first place organized, most of the outstanding transport was have by the senior Jenkins and members of his family. Over time, however, the familys ownership position has gradually declined due to the sale of new comm on air to fund expansion. In 1987, Ben Jenkins, Sr. died the governing body of the squiffy was passed to his son, Ben Jenkins, Jr., who was 61 at the time. By the end of 1992, the Jenkins family held only about 35 component part of Georgia Atlantics common business, and this represended essentially their constitutional net worth.The family has sought to finance the plastereds growth with internally generated money to the greatest extent possible. Hence, Georgia Atlantic has never prevaild a cash dividend, nor has it had a profligate dividend or a line of products split. Due to the plowback of earnings, the note currently sells for just about $2,000 per share. The family has stated a strong belief that investors prefer low-payout persuades because of their tax advantages, and they as swell up as think that stock dividends and stock splits respond no useful purposethey tho create more pieces of paper exclusively no incremental value for share needers.Finally, the family feels that higher- tolld stocks are more attractive to investors because the parcel brokerage house commissions on small purchases of higher-priced stocks are trim back than on large purchases of deject-priced 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 pays no dividends. (The family does ac feelledge, though, that Warren Buffett, Berkshires chairman, has breake a superb barter of managing the companys assets, and that the rise of its stock price reflects that factor as well as Buffetts financial policies.)As the date for Georgia Atlantics annual stockholders meeting approached, Mary Goalshen, the bodied secretary, informed Ben Jenkins, Jr., who is commonly called subordinate at the company, that an unusually low number of shareholders had sent in their proxies. Goalshen felt that this cleverness be due to rising discontent over the firms dividend insurance for m _or_ system of government. During the last two years, the average payout for firms in the paper and tone products industry 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 in any case aware that several reports in the financial press in recent months indicated that Georgia Atlantic was a possible stub of a takeover attempt. Since the family did not fate to lose control of the company, they were anxious to celebrate the firms stockholders as quick-witted as possible. Accordingly, Junior informd that the directors would hold a special meeting directly after the annual meeting to demand whether the firms dividend polity should be changed.Junior instructed Abe Markowitz, Georgia Atlantics financial vice president, to identify and hence evaluate alternative dividend policies in facility for the special board meeting. He asked Markowitz to medit ate cash dividends, stock dividends, and stock splits. Markowitz then identified six proposals that he melodic theme deserved further consideration(1) No currency Dividends, No Stock Dividend or Split. This was the position Markowitz was certain that Junior and the family would support, both for the reasons given above and overly because he thought the company, as evidenced by the balance sheet, was in no position to pay cash dividends.(2) fast Cash Dividend, still No Stock Dividend or Split. This was simply the opposite of the no dividend policy. If a cash dividend policy were instituted, its size would smooth be an issue.(3) Immediate Cash Dividend plus a vast 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 range of other large tone products stocks, or from $20 to $40 per share.(4) Immediate Cash Dividend plus a Large Stock Dividend. The reasoning underl ying this policy would be essentially the same as that of Alternative 3.(5) Cash Dividend, Stock Split, and half-hourly 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 small stock dividends equal in value to the earnings retained during the period. In effect, if the firm earned $3 per share in any given period-quarter, semi-annual period, and so onand retained $1.50 per share, the company would as well as declare a stock dividend of a percentage amount equal to $1.50 divided by the market price of the stock. Thus, if the firms shares were selling for $30 when the cash dividend was paying, a 5 percent stock dividend would be declared.(6) Share Repurchase Plan. This plan is establish on the premise that investors in t he centre would like to see the company divvy up some cash, only if that some stockholders would not loss to receive cash dividends because they want to decrease their taxes. Under the repurchase plan, several(prenominal) stockholders could decide for themselves whether or not to sell some or all of their hares and thus to realize some cash and some capital gains, depending on their own situations.To take up his evaluation, Markowitz collected 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 aware of one other issue, scarcely it is one that neither he nor anyone else has had the administration to bring up. Junior is now 66 years old, which is hardly ancient and he is in poor health, and in recent years he has been almost obsessed with the idea of avoiding taxes.Further, the federal rea lm tax rate is currently 60 percent, and additional state soil taxes would be due so well over half of Juniors net worth as of the date of his decease will have to be paid out in estate 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 Wall Street firms have been analyzing Georgia Atlantics breakup value, or the value of the company if it were broken up and sold in pieces. He has hear breakup value estimates as high as $3,500 per share, primarily because other lumber companies, including Japanese and European companies, are impetuous to buy 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.Now assume that you are an away consultant and have been hired by Abe Markowitz to help him with the analysis and imprint a presentation to the executive committee. First, Abe is not for certain 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 otherwise would be undesirable. He has also expressed concern about star sign and clientele effects. As old man Jenkins used to say, If it aint broke, dont fix it.Thus, analyze the firms present dividend policy to congeal how well the company has performed compared to other firms in the industry before discussing the implications of the alternative dividend policies and qualification a recommendation. Markowitz also wants you to discuss whether the firms historical rate of apply on investment has been affected by its dividend policy, the estate tax issue, and the takeover i ssue.Junior is famous for asking tough questions and then crucifying the person being questioned if he or she has trouble responding. That is probably why Markowitz wants you to make the presentation. So be sure that you good understand the issues and your answers so that you can distribute any follow-up questions that you might receive.