Case Study - Cooper Industries

Dividend Policy at FPL Group, Inc. (A) & (B)

1. A) Why do firms pay dividends?

Firms pay dividends depending on their financing and investment decisions. If they plan on financing through borrowing, then that releases cash for dividends in order to eliminate having large cash balances on hand. In addition, dividends are an immediate cash payment to the stockholder that they can spend or reinvest.

B) What, in general, are the advantages of paying dividends?

Dividend payments can be considered advantageous as signaling devices in the market. If dividends increase, it is interpreted that the company’s value has increased and the stock goes up. If the earnings decrease and the company continues to pay the regular dividends, this makes the statement that the company is sound and the decrease is temporary and in the long run the money will be there. If the company pays out too much, then they can replace the cash by issuing new stock at no cost without signaling consequences.

C) What are the disadvantages of paying dividends?

Dividend payments can be a disadvantage in the market as a signaling device. If dividends decrease, it is interpreted that the company’s value has decreased. This can cause the investors to sell the stock and send the price down in the market.

Another disadvantage is that paying dividends may result in selling new stock if the earnings retained are reduced or exhausted. This can lead to fewer earnings for the stockholder. Furthermore, dividends are taxed as ordinary income.

2. A) What are the most important issues confronting the FPL Groups in May 1994?

The most important issues confronting FPL Groups are:

• The effect that retail wheeling will have on FPL if it is authorized by the

Florida Public Service Commission is that it could bring about fierce

competition from large investor-owned utilities in neighboring states.