09/10/2015

Daktronics(E):DividendPolicyin2010

Daktronics (E): Dividend Policy in 2010

* Required

How vulnerable is the company to a takeover? *

No,thecompanywasnotatallvulnerablefortakeover.
Ithad7080%marketshareinprofessionalsportsmarket,6070%in
DivisionImarket,4060%indigitaladvertisingand4050%in
Transportationmarket.Inanutshell,itwasagiganticfirmwithacash
reserveof$36.5millionin2009andanassetbaseof$324.87million.
Seeingthestrongpositionofthefirmitwasnotatallreasonableto
evenconsiderthattherewasanychanceoftakeover.

How well positioned is the firm for growth through mergers and acquisitions? *
Thecompanyhadanorganicstrategyofgrowthitalwaysbelievedin
internalgrowth.Thecompanymighthavedonefewsmallacquisitions
inhistory.Even,theirkeycompetitorswerenoteyeingonanybig
acquisitions.Consideringallthiswecanvouchthatthegrowthofthe
firmisnotatallthroughmergersandacquisitions,ratheritwasinternal.

Estimate the weighted average cost of capital including the effect on beta of your
recommended debt level *
NA

What are the advantages and disadvantages of increasing dividends? *

willbemorecautiousindifferentcapitalexpenditure.

Disadvantages:
1.Sometimesitgivesabadsignaltotheinvestors.
2.Thecompanywillbeindearthofcashandhencewouldface
difficultyinanyfuturelucrativeopportunity.
3.Wouldnotbeinahealthypositiontotackleeconomicslowdown.

Discuss the implications of the various theories of capital structure: M&M with taxes,
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tradeoff,
and pecking order theories for Daktronics use of debt *
Undertradeofftheory,acompanywouldhave
a.bankruptcycost.
b.Taxshield.
c.Transactioncost.
Consideringallthesecompaniesneedtotakecarefuldecisionwhile
takingtakingdebt.SeeingthecurrentpositionofDaktroincs,acash
reachfirm,theyshouldtrysomedebtontheirbooktoenjoytax
shield.
PeckingOrderTheories:
========================

Should the Treasurer borrow more? Why or why not? *

No,thetreasurershouldnotborrowmore.Thecompanyisnothaving
anysignificanthistoryofborrowingandalsoitisalreadysittingona
hugecash.So,thereisnotoborrow.

If dividends should be increased, what form should the distribution be? How much should
they pay out? *
Thecompanywasfollowingatrendofpayingdividends.Anysignificant
deviationfromthatmaysignalwrongthingstomarket.Hencethey
shouldpaytheincreaseddividendsintheformofSpecialDividends.

Comment on Daktronics past financial performance using financial ratios, common size
income statements and balance sheets, and equity free cash flows *
VeryConservativefirm(Lowdividendpayment~10%payoutratio)in
acasewheretheROEisaround15%.
Strongcashflow.
Lowdebttoequityratio.

How much unused debt capacity does the company have? *

Currentdebtcapitalizationofthefirmisalmostnull.Howeverthe
companyhasatotalassetbaseof$324millionandalongtermdebtof
only$23000.Seeingthisandhighcashflow($36.5million),wecan
concludethatthecompanyhasahugedebtcapacity.

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Based on your percent of sales model, compare and contrast the financial ratios from the
historical period with those of the planning period *
Saleswereprojectedtofallto$424millionfrom$581millioninthe
previousyear.Itshouldnotbeamajorconcernforthefirmkeeping
macroeconomicscenarioofthattimeinmind.

Construct a free cash flow (FCF) valuation model for the next four years and estimate a price
per share today. Assume that required cash balances equal $20 million each year. Estimate a
terminal value for the company using both the constant growth in FCF model and a multiple of
EBITDA. Assume an exit EBITDA multiple in year 4 of 9x EBIDTA. How does your estimated
price compare with the closing price given in the case? *
NA

Using your historical financial ratio analysis and analysts reports, estimate a percent of sales
model for Daktronics pro forma income statements and balance sheets over the next four
years and give your comments *
NA

Construct equity free cash flows for the next four years and estimate how much Daktronics
could afford to pay as dividends, assuming that required cash balances equal $20 million
each year. Thus, cash balances in excess of $20 million are excess cash that could be paid
out along with the equity free cash flow *
NA

Use FRICTO analysis (F = flexibility of future financing choice, R = risk of increasing

dividends, I = impact of increased dividends on income, C = impact of dividends on control of
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the company, T = tax effects of greater dividends, O = other issues associated with large
dividends) to frame your analysis *
NA

Your Name: *
SecB>G15071>AnupamKalita

Discuss the advantages and disadvantages of increasing debt in Daktronics *

=============
1.Taxshield.
2.Moredisciplinedoperationandmanagement.
Disadvantage:
==============
1.Noformerexperienceofdebthandling.
2.Gradingdegradation.
3.Dissatisfactiontoinvestors

Should dividends be increased? *

Yesseeingthetrendofthattime,thecompanyhada
1.ahugecashflow
2,Hugecurrentassetbase
3.Nointentionforacquisition.
4.Noplanforhugecapitalexpenditure.
5.Noplanforinvestmentininternationalmarket.

What are the implications for capital structure and unused debt capacity of increasing
dividends? *
Thecompanyisunderutilizingitsdebtcapacityandalsoplayingvery
conservatively.Theimplicationofthesameisthatthearenotbeing
abletotakeleverageofdebt.

Evaluate the companys current debt/equity policy *

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Currentlythecompanyiscurrentlyhavingnodebtinitsbook.

Evaluate the companys current dividend policy *

Thoughinitiallythecompanytookaveryconservativeapproachfor
dividendpayment,butwithincreasingcashbaseandforinvestor
appeasementtheystartedpayingmarginaldividend.Theyinitiallypaid
adividendof5centsin2004andincreasedthesameby11.5%
CAGR.

How does the company compare to industry averages? Is your analysis consistent with the
stock price performance shown in Figure 1 of the case? *
Thecompanyhadmorethan50%marketshareinalmostallthe
segmentstheywereoperating.Havingsaidthat,thecompany'sshare
wasexpectedtoincreasemonotonicallyovertime.
However,itwasnotconsistentfromtheshareperformanceitshowedin
figure1.

Discuss how different shareholder groups might respond to increased dividends *

Thecompanyhad16.3%stocksheldbyinsiderswhile58%washeld
by298institutionalinvestors.
Anincreaseddividendpaymentinatimeofeconomicslowdownmay
gainlotsofconfidenceamongstthetheshareholders.

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