Georgia Atlantic Company Essay Example for Free

tabun Atlantic Company set aboutDuring the depression of the 1930s, Ben Jenkins, Sr., a wealthy, expansion-oriented toneman whose family had been in the lumber business in the southeastern United States for some(prenominal) generations, began to acquire small, depressed sawmills and wholesale lumber companies. These businesses prospered during World War II. After the war, Jenkins anticipated that the demand for lumber would surge, so he aggressively sought new flavourlands to supply his sawmills. In 1954, all of Jenkinss companies were consolidated, along with some separate independent lumber and milling companies, into a single corporation, the atomic number 31 Atlantic Company. By the end of 1992, Georgia Atlantic was a major force in the lumber industry, though not one of the giants. Still, it possessed more timber and timberlands in relation to its use of timber than any other lumber telephoner. Worldwide demand for lumber was strong in spite of a soft area economy, and its timber supply should get put Georgia Atlantic in a good position. With its assured supply of pulpwood, the company could run its mills at a steady rate and, thus, at a low per-unit production cost. However, the company does not afford sufficient manufacturing capacity to fully utilize its timber supplies so it has been forced to sell raw timber to other lumber companies to generate cash flow, losing effectiveness profits in the process.Georgia Atlantic has enjoyed fast growth in both sales and assets. This rapid growth has, however, caused some financial problems as indicated in Table 1. The condensed sleep tag ends shown in the table bump that Georgia Atlantics financial leverage has increased substantially in the last 10 years, while the devoteds liquidity position markedly deteriorated over the same period. Remember, though, that the balance sheet figures reflect historical costs, and that the market treasures of the assets could be much higher than the values shown on the balance sheet.For practice, Georgia Atlantic purchased 10,000 acres of cut timberland in southern Georgia in 1961 for $10 per acre, then planted 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 firms balance sheet at $230 per acre, the original $10 plus capitalized set costs. Note also 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 originally organized, most of the outstanding computer storage was owned by the fourth-year Jenkins and members of his family. Over time, however, the familys ownership position has gradually declined due to the sale of new common stress to fund expansion. In 1987, Ben Jenkins, Sr. died the presidency of the firm was passed to his son, Ben Jenkins, Jr., who was 61 at the time. By the end of 1992, the Jenkins family hel d only if about 35 percent of Georgia Atlantics common stock, and this represented essentially their consummate crystalise worth.The family has sought to finance the firms growth with internally generated funds to the greatest termination possible. Hence, Georgia Atlantic has never declared a cash dividend, nor has it had a stock dividend or a stock split. Due to the plowback of earnings, the stock currently sells for closely $2,000 per manage. The family has articulated a strong belief that investors elect low-payout stocks because of their tax advantages, and they also think that stock dividends and stock splits serve no useful purposethey provided create more pieces of paper nevertheless no incremental value for shareholders.Finally, the family feels that higher-priced stocks are more winsome to investors because the fortune brokerage commissions on small purchases of higher-priced stocks are lower than on large purchases of lower-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 acknowledge, though, that Warren Buffett, Berkshires chairman, has done a superb job 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 corporate secretary, informed Ben Jenkins, Jr., who is commonly called Junior at the company, that an unusually low number of shareholders had sent in their proxies. Goalshen felt that this might be due to insurrection discontent over the firms dividend form _or_ system of government. During the last two years, the average payout for firms in the paper and timberland products industry has been about 35 percent yet for the 58th straight year, Georgia Atlantics maturate, on a lower floor the Jenkins familys dominance, chos e not to pay a dividend in 1992.The Jenkins family was also aware that several reports in the financial press in recent months indicated that Georgia Atlantic was a possible target of a coup detat attempt. Since the family did not want to lose control of the company, they were anxious to keep the firms stockholders as content as possible. Accordingly, Junior announced that the directors would hold a special meeting immediately by and by the annual meeting to consider whether the firms dividend form _or_ system of government should be changed.Junior instructed Abe Markowitz, Georgia Atlantics financial vice president, to identify and then evaluate alternative dividend policies in preparation for the special board meeting. He asked Markowitz to consider cash dividends, stock dividends, and stock splits. Markowitz then identified six proposals that he conception deserved further consideration(1) No Cash Dividends, No Stock Dividend or Split. This was the position Markowitz was cer tain(p) that Junior and the family would support, both for the reasons given up above and also because he thought the company, as evidenced by the balance sheet, was in no position to pay cash dividends.(2) Immediate Cash Dividend, except No Stock Dividend or Split. This was simply the opposite of the no dividend insurance insurance policy. If a cash dividend policy were instituted, its size would appease 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 range of other large forest products stocks, or from $20 to $40 per share.(4) Immediate Cash Dividend plus a Large Stock Dividend. The reasoning underlying this policy would be essentially the same as that of Alternative 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 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 also 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 paid, a 5 percent stock dividend would be declared.(6) Share Repurchase Plan. This plan is base on the premise that investors in the aggregate would like to see the company distribute some cash, but that some stockholders would not want to receive cash dividends because they want to decrease their taxes. Under the repurchase plan, separate 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 begin 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, but it is one that neither he nor anyone else has had the nerve to bring 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 obsessed with the idea of avoiding taxes.Further, the federal estate tax rate is currently 60 percent, and additional state estate taxes would be due so well over half of Juniors net worth as of the date of his death will have to be paid out in estate taxes. Since estate taxes are based on the value of the estate on the dat e 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 eager 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 outside consultant and have been hired by Abe Markowitz to help him with the analysis and groom a presentation to the executive committee. First, Abe is not sure wh ether an announced dividend policy is a good idea. He believes an announced policy could cause the firm to feel forced to push back actions that otherwise would be undesirable. He has also expressed concern about signaling 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 determine how well the company has performed compared to other firms in the industry earlier discussing the implications of the alternative dividend policies and making a recommendation. Markowitz also wants you to discuss whether the firms historical rate of drive away on investment has been affected by its dividend policy, the estate tax issue, and the takeover issue.Junior is famous for ask 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 thoroughly understand the issues and your answers so that you can handle any run through questions that you might receive.