Hajee Mohammad Danesh Science and Technology University

Dinajpur−5200, Bangladesh.

A Term Paper on
Financing Mix and Choices, Dividend Policy,
Analyzing Cash Return to Stockholders and
Beyond Cash Dividends: Buybacks, Spinoffs and
Divestitures.
Submission Date: 17-04- 2022

Course Title: Corporate Finance Course Code: FIN 501

Prepared By Submitted To
Md. Rakibul Islam Humaira Begum
ID: 1603194, Assistant Professor
Level: 5 Semester: I Department of Finance and Banking
MBA 11th Batch Faculty of Business Studies
Major in Finance HSTU, Dinajpur.
Faculty of Business Studies
HSTU, Dinajpur
 Literature Review

There are number of research paper written in dividend policies earlier, which analyze the
relationship between dividend policy and share prices. Dividend policy has been an area of
interest for researchers in finance since the establishment of Joint Stock Companies. Fama, E.
and K. French, 2001 through a research work comes to a conclusion that shareholders prefer the
smooth flow of dividend income. Grullon, G., Michaely (2002) concluded that dividend rate and
share price of the firm are related, i.e., with an increase in dividend rate the share price increases
and vice versa. Graham et.al. (1962) concluded that dividends are the only purpose of the firm’s
existence. Miller and Modigliani (1961) come to a conclusion that the payment of dividends has
no effect on the value of the firm and is therefore irrelevant. Baker, Farrelly and Edelman (1985)
in a research work surveyed 318 New York stock exchange firms and concluded that the major
determinants of dividend payments are anticipated level of future earnings and pattern of past
dividends.

INTRODUCTION

Financial management is mainly concerned with the raising of funds minimizing the cost of
capital and allocating the funds in long term investment which involve Capital budgeting
decision. The next important decision is deciding how much profit to retain and how much to
distribute as dividend i.e., dividend decision. Dividend policy is a strategy used by a company to
determine the amount and timing of dividend payments. This study assumes that firms that have
debt ratios different from their optimal debt ratios, once made aware of this gap, will want to
move to the optimal ratios. That does not always turn out to be the case. There are a number of
firms that look under levered, using any of the approaches described in the last section, but
choose not to use their excess debt capacity. Conversely, there are a number of firms with too
much debt that choose not to pay it down. At the other extreme are firms that shift their financing
mix overnight to reflect the optimal mix. Firms can also change their debt ratios by financing
new investments disproportionately with debt or equity. We begin with stock buybacks, like
dividends, stock buybacks reduce the value of a firm's assets, but unlike dividends, they also
reduce the number of shares outstanding. Capital structure is the means by which an organization
is financed. It is the mix of debt and equity capital maintained by a firm.

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Table of Contents
Discussion ................................................................................................................................................. 4
The financing mix and choices ........................................................................................................... 4
No change, Gradual change or immediate change: .......................................................................... 4
Implementing Change in Financial Mix ............................................................................................ 4
Matching Financing Cash Flow with Asset Cash Flow .................................................................... 6
Dividend Policy .................................................................................................................................... 6
The Dividend Process .......................................................................................................................... 6
The Dividend Payment Time Line ...................................................................................................... 7
Types of Dividends................................................................................................................................. 3
Measures of Dividend Policy .............................................................................................................. 3
Dividends Are Sticky ........................................................................................................................... 5
A Firm’s Dividend Policy Tends to Follow the Life Cycle of the Firm .......................................... 5
Differences in Dividend Policy across Countries.................................................................................... 6
THE “DIVIDENDS ARE BAD” SCHOOL ...................................................................................... 8
A Cash Flow Approach to Analyzing Dividend Policy .................................................................... 8
Beyond cash dividends: Buybacks, spinoff and divestitures ......................................................... 11

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 Discussion

The financing mix and choices

An optimal capital structure is the best mix of debt and equity financing that maximizing a
company’s market value while minimizing its cost of capital minimizing the weight average cost
of capital. Finding the optimal mix of financing the capital structure that result in maximum
value is a key challenge you will have to face in starting and operating your business. Your
financial mix will typically be composed of two components debt and equity. According to
Akeem (2014) financing mix is the combination of the debt and equity structure. of a company.
It can also be referred to as the way a corporation finances its assets through. some combination
of equity, debt or hybrid securities; that is the combination of both equities. and debt.

No change, Gradual change or immediate change:

We are implicitly assumed that firm have debt ratio different their optimal debt ratio. Once made
aware of this gap will want to move to their optimal ratio. Capitalization change refers to a
modification of a company's capital structure — the percentage of debt and equity used to finance
operations and growth. Usually, a company starts out with equity and then, as its prospects
strengthen and it matures, gradually starts adding debt to its balance sheet.

A gradual change or process occurs in small stages over a long period of time, rather than
suddenly. In this section we look at the factors a firm might have to considers in deciding
whatever to leave. its debt ratio unchanged change greatly or change immodestly to the optimal
mix.

Implementing Change in Financial Mix

Four basic paths are available for a firm that want to change in financial mix:

• Recapitalization: Recapitalization is the process of restructuring a company's debt and

equity mixture, often to stabilize a company's capital structure. The process mainly
involves the exchange of one form of financing for another, such as removing
preferred shares from the company's capital structure and replacing them with bonds.
Recapitalization is a type of corporate reorganization involving substantial change in
a company's capital structure. Recapitalization may be motivated by a number of
reasons. Usually, the large part of equity is replaced with debt or vice versa.

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• Divestiture and use proceeds: In finance and economics, divestment or divestiture is
the reduction of some kind of asset for financial, ethical, or political objectives or sale
of an existing business by a firm. A divestment is the opposite of an investment.
Divestiture is an adaptive change and adjustment of a company's ownership and
business portfolio made to confront with internal and external changes. Sometimes,
such an action can be a spin-off. In the United States, divestment of certain parts of a
company can occur when required by the Federal Trade Commission before a merger
with another firm is approved. A company can divest assets to wholly owned
subsidiaries.
• Financing new investment: Firms can also change their debt ratios by financing new
investment disproportionately with debt or equity. They use their much higher
increase debt ratio conversely if they use a much higher proportion of equity in
financing new investment than their existing equity ratio, they will decrease their debt
ratio.
• Changing dividend payout: The dividend payout ratio is the ratio of the total amount
of dividends paid out to shareholders relative to the net income of the company. It is
the percentage of earnings paid to shareholders via dividends. The amount that is not
paid to shareholders is retained by the company to pay off debt or to reinvest in core
operations. It is sometimes simply referred to as simply the payout ratio. The dividend
payout ratio is the proportion of earnings paid out as dividends to shareholders,
typically expressed as a percentage. The dividend payout ratio can be calculated as
the yearly dividend per share divided by the earnings per share (EPS), or equivalently,
the dividends divided by net income.

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Matching Financing Cash Flow with Asset Cash Flow
Cash flow matching is a process of hedging in which a company or other entity matches its cash
outflows. Asset matching is using an asset to pay for future liabilities. Investors convert one or
more assets in their portfolios to one with higher liquidity. Matching can hedge reinvestment,
liquidity, and action bias risk. There are many expenses you can use liability-driven investing
for. Asset using pay for future liabilities and future benefits of wealth maximizing. Cash flow is
the movement of money in and out of a company. Cash received signifies inflows, and cash spent
signifies outflows. The cash flow statement is a financial statement that reports on a company's
sources and usage of cash over some time. A company cash flow is typically categorized as cash
flows from operations, investing, and financing. There are several methods used to analyze a
company's cash flow, including the debt service coverage ratio, free cash flow, and unlevered
cash flow. Cash flow from assets is the aggregate total of all cash flows related to the assets of a
business. This information is used to determine the net amount of cash being spun off by or used
in the operations of a business.

Dividend Policy
Dividend policy is a strategy used by a company to determine the amount and timing of dividend
payments. The dividend policy framed by an organization is one of the crucial issues in corporate
finance The dividends policy framed by an organization is one of the crucial issues in corporate
finance since it may have an impact on the firm’s value and shareholders wealth. The dividend
is planned and declared by the Board of Directors. Dividend policy refers to the proportion of
earning distributed as dividend and the rest kept for further investment i.e., retained earnings.
From the viewpoint of financial management, the key objective is to determine the dividend
policy that will maximize the market price of the shares of the firm. Dividend policy remains one
of the most debatable matters in corporate finance. Financial economists have engaged in
designing and investigate corporate dividend policy.

The Dividend Process

Firms in the United States generally pay dividends every quarter, whereas firms in other
countries typically pay dividends on a semi-annual or annual basis. Let us look at the time
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 line associated with dividend payment and define different types of dividends.

The Dividend Payment Time Line

Dividends in publicly traded firms are usually set by the board of directors and paid out to
stockholders a few weeks later. There are several key dates between the time the board
declares the dividend until the dividend is actually paid.
• The first date of note is the dividend declaration date, the date on which the board of
directors declares the dollar dividend that will be paid for that quarter (or period).
This date is important because by announcing its intent to increase, decrease, or
maintain dividend, the firm conveys information to financial markets. Thus, if the
firm changes its dividends, this is the date on which the market reaction to the change
is most likely to occur.
• The next date of note is the ex-dividend date, at which time investors must have bought
the stock to receive the dividend. Because the dividend is not received by investors
buying stock after the ex-dividend date, the stock price will generally fall onthat day to
reflect that loss.
• At the close of the business a few days after the ex-dividend date, the company closes
its stock transfer books and makes up a list of the shareholders to date on the holder-
of-record date. These shareholders will receive the dividends. There should be
generally be no price effect on this date.
• The final step involves mailing out the dividend checks on the dividend payment date.
In most cases, the payment date is two to three weeks after the holder-of-record date
Although stockholders may view this as an important day, there should be no priceimpact
on this day either.

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 Figure 1 presents these key dates on a time line.
Figur1 The Dividend Timeline

Announcement Date Ex-Dividend Day Holder-of-record day Payment Day

2 to 3 weeks 2-3 days 2-3 weeks

Board of Directors Stock has to be boughtby Company closes Dividend is

announces quarterly this date for investor to books and records paid to
dividend per share receive dividends owners of stock stockholders

Types of Dividends
There are several ways to classify dividends. First, dividends can be paid in cash or as
additional stock. Stock dividends increase the number of shares outstanding and generally
reduce the price per share. Second, the dividend can be a regular dividend, which is paid
at regular intervals (quarterly, semi-annually, or annually), or a special dividend, which is
paid in addition to the regular dividend. Most U.S. firms pay regular dividends every
quarter; special dividends are paid at irregular intervals. Finally, firms sometimes pay
dividends that are in excess of the retained earnings they show on their books. These are
called liquidating dividends and are viewed by the Internal Revenue Service as return on
capital rather than ordinary income. As a result, they can have different tax consequences
for investors.

Measures of Dividend Policy

We generally measure the dividends paid by a firm using one of two measures.
The first is the dividend yield, which relates the dividend paid to the price of the stock:
Dividend Yield = Annual Dividends per Share/Price per Share
The dividend yield is significant because it provides a measure of that component of the
total return that comes from dividends, with the balance coming from price appreciation.
Expected Return on Stock = Dividend Yield + Price Appreciation
Some investors also use the dividend yield as a measure of risk and as an investmentscreen,
that is, they invest in stocks with high dividend yields. Studies indicate that stocks

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with high dividend yields, after adjusting for market performance and risk, earn excess
returns.
Dividends Tend to Follow Earnings

It should not come as a surprise that earnings and dividends are positively correlated over
time because dividends are paid out of earnings. Figure 10.5 shows the movement in both
earnings and dividends between 1960 and 2008 for companies in the S&P 500.

Take note of two trends in this graph. First, dividend changes trail earnings changes over
time. Second, the dividend series is much smoother than is the earnings series.
dividends to match long-term and sustainable shifts in earnings, but they increase dividends only
if they feel they can maintain these higher dividends. Because firms avoid cutting dividends,
dividends lag earnings. Finally, managers are much more concerned about changes in dividends
than about levels of dividends.

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Dividends Are Sticky
Firms generally do not change their dollar dividends frequently. This reluctance to change dividends, which
results in sticky dividends, is rooted in several factors. One is the firm’s concern about its capability to maintain
higher dividends in future periods. Another is that markets tend to take a dim view of dividend decreases, and the
stock price drops to reflect that. Figure 10.6 provides the percentages of all U.S. firms that increased, decreased,
or left unchanged their annual dividends per share from 1989 to 2012. As you can see, in most years the number
of firms that do not change their dollar dividends far exceeds the number that do. Among the firms that change
dividends, a much higher percentage, on average, increase dividends than decrease them. Even in 2008 and 2009,
crisis years by most measures, the number of firms that increased dividends outnumbers the firm that cut
dividends.

A Firm’s Dividend Policy Tends to Follow the Life Cycle of the Firm
In particular, we noted five stages in the growth life cycle—start-up, rapid expansion, high growth, mature
growth, and decline. In this section, we will examine the link between a firm’s place in the life cycle and its
dividend policy. Not surprisingly, firms adopt dividend policies that best fit where they are currently in their
life cycles. For instance, high-growth firms with great investmentopportunities do not usually pay dividends,
whereas stable firms with larger cash flows and fewer projects tend to pay more of their earnings out as
dividends. Figure 10.7 looks at the typical path that dividend payout follows over a firm’s life cycle.

This intuitive relationship between dividend policy and growth is emphasized when we look at the
relationship between a firm’s payout ratio and its expected growth rate. For instance, we classified firms on
the New York Stock Exchange in January 2009 into six groups, based on analyst estimates of expected
growth rates in earnings per share for the next five years and estimated the dividend payout ratios and
dividend yields foreach class; these are reported in Figure
 Source: Value Line Database projected for firms in January 2009

The firms with the highest expected growth rates pay the lowest dividends, both as a
percent of earnings (payout ratio) and as a percent of price (dividend yield).

Differences in Dividend Policy across Countries

Figures 5 to 8 showed several trends and patterns in dividend policies at U.S. companies. They
share some common features with firms in other countries, and there are some differences. As in
the United States, dividends in other countries are stickyand follow earnings. However, there are
differences in the magnitude of dividend payout ratios across countries. Figure 9 shows the
proportion of earnings paid out in dividends in the G-7 countries in 1982–84 and again in 1989–
91, with an update for 2009values.

Figure 9: Dividend Payout Ratios G7 Countries

These differences can be attributed to:

1. Differences in Stage of Growth: Just as higher-growth companies tend to pay out less of
their earnings in dividends (see Figure 10.8), countries with higher growth pay out lessin
dividends. For instance, Japan had much higher expected growth in 1982–84 than the other
G-7 countries and paid out a much smaller percentage of its earnings as dividends. As Japan’s growth
declined, its payout ratio has risen.

2. Differences in Tax Treatment: Unlike the United States, where dividends are doubly taxed,
some countries provide at least partial protection against the double taxation of dividends.
For instance, Germany taxes corporate retained earnings at a higher rate than corporate
dividends and the United Kingdom allows investors to offset corporate taxes against taxes
due on dividends, thus reducing the effective tax rate on dividends.
 3. Differences in Corporate Control: When there is a separation between ownership and
management, as there is in many large publicly traded firms, and where stockholders
have little control over managers, the dividends paid by firms will be lower. Managers, left
to their own devices, have an incentive to accumulate cash.

THE “DIVIDENDS ARE BAD” SCHOOL

In the United States, dividends have historically been taxed at much higher rates than capital gains.
Based on this tax disadvantage, the second school of thought on dividends argued that dividend
payments reduce the returns to stockholders after personal taxes. Stockholders, they posited, would
respond by reducing the stock prices of the firms making these payments, relative to firms that do
not pay dividends. Consequently, firms would be better off either retaining the money they would
have paid out as dividends or repurchasing stock. In 2003, the basis for this argument was largely
eliminated when the tax rate on dividends was reduced to match the tax rate on capital gains. In
this section, we will consider both the history of tax-disadvantaged dividends and the potential
effects of the tax law changes.

A Cash Flow Approach to Analyzing Dividend Policy

When assessing the cash returned by a firm to its stockholders, in the form of dividends and
buybacks, how do we determine when a firm is returning too much and when it is too little? In the
cash flow approach, we follow four steps. We first measure how much cash is available to be paid
out to stockholders after meeting debt service and reinvestment needs and compare this amount to
the amount actually returned to stockholders. We then have to consider how good existing and
new investments in the firm are. Third, based on the cash payout and project quality, we consider
whether firms should be accumulating more cash or less. Finally, we look at the relationship
between dividend policy and debt policy.

Step 1: Measuring Cash Available to Be Returned to Stockholders

To estimate how much cash a firm can afford to return to its stockholders, we begin with the net
income—the accounting measure of the stockholders’ earnings during the period—and convert it
in to a cash flow for equity investors by subtracting out a firm’s reinvestment needs, broken up
into two components:
• Investments in long-term assets: Any capital expenditures, defined broadly to include
acquisitions,
are subtracted from the net income because they represent cash outflows. Depreciation and
amortization, on the other hand, are added back in because they are noncash charges. The
difference between capital expenditures and depreciation is referred to as net capital expenditures
and is usually a function of the growth characteristics of the firm. High-growth firms tend to have
high net capital expenditures relative to earnings, whereas low-growth firms may have low (and
sometimes even negative) net capital expenditures.
• Investments in short-term assets: Increases in working capital drain a firm’s cash flows, whereas
decreases in working capital increase the cash flows available to equity investors. Firms that are
growing fast, in industries with high working capital requirements (e.g., retailing), typically have
large increases in working capital. Because we are interested in the cash flow effects, we consider
only changes in noncash working capital in this analysis.

Step 2: Assessing Project Quality

The alternative to returning cash to stockholders is reinvestment. Consequently, a firm’s

investment opportunities influence its dividend policy. Other things remaining equal, a firm with
better projects typically has more flexibility in setting dividend policy and defending it against
stockholder pressure for higher dividends. But, how do we define a good project? From our earlier
assessment of investment decisions, a good project is one that earns at least the hurdle rate, which
is the cost of equity if cash flows are estimated on an equity basis or the cost of capital if cash
flows are measured on a predict basis. In theory, we could estimate the expected cash flows on
every project available to the firm and calculate the internal rates of return (IRR) or net present
value (NPV) of each project to evaluate project quality. There are several practical problems with
this, however. First, we have to be able to obtain the detailed cash flow estimates and hurdle rates
for all available projects, which can be daunting if the firm has dozens or even hundreds of projects.
The second problem is that, even if these cash flows are available for existing projects, they will
not be available for future projects. As an alternative approach to measuring project quality,

Step 3: Measuring the Expected Dividend

A firm has good projects and is paying out more (in dividends and stock buybacks) than its

FCFE. In this case, the firm is losing value in two ways. First, by paying too much in dividends, it
creates a cash shortfall that has to be met by issuing more securities. Second, the cash shortfall
often creates capital rationing constraints; as a result, the firm may reject good projects it,
otherwise, would have taken.
A firm has good projects and is paying out less than its FCFE as a dividend. Although it will
accumulate cash as a consequence, this firm can legitimately argue that it will have good projects
in the future in which it can invest the cash, though investors may wonder why it did not take the
projects in the current period.
A firm has poor projects and is paying out less than its FCFE as a dividend. This firm will
also accumulate cash, but it will find itself under pressure from stockholders to distribute the cash
because of their concern that the cash will be used to finance poor projects.
A firm has poor projects and is paying out more than its FCFE as a dividend. This firm first
has to deal with its poor project choices, possibly by cutting back on those investments that make
returns below the hurdle rate. Because the reduced capital expenditure will increase the FCFE,
this may take care of the dividend problem. If it does not, the firm will have to cut dividends as
well.

Step 4: Interaction between Dividend Policy and Financing Policy

The analysis of dividend policy is further enriched—and complicated—if we bring in the firm’s
financing decisions as well. In Chapter 9, we noted that one of the ways a firm can increase
leverage over time is by increasing dividends or repurchasing stock; at the same time, it can
decrease leverage by cutting or not paying dividends. Thus, we cannot decide how much a firm
should pay in dividends without determining whether it is under- or over levered and whether or
not it intends to close this leverage gap.
Beyond cash dividends: Buybacks, spinoff and divestitures
A cash dividend is the distribution of funds or money paid to stockholders generally as part of the
corporation's current earnings or accumulated profits. Cash dividends are paid directly in money,
as opposed to being paid as a stock dividend or other form of value. In this chapter, we consider
other ways in which firms can affect their value per share. We begin with stock buybacks; like
dividends, stock buybacks reduce the value of a firm’s assets, but unlike dividends, they reduce
the number of shares outstanding. While we presented evidence on the magnitude of stock
buybacks in the last chapter, we consider the choice between dividends and stock buybacks in this
one. When should a firm opt to buy back stock rather than increase dividends, or in the more
extreme scenario, replace dividend payments with a stock buyback program? Finally, we consider
actions that change the nature of a stockholders’ claims on a firm’s assets. We begin with
divestitures, where firms sell some of their assets to another firm or entity; divestitures are often
followed either by stock buybacks or special dividends. As an alternative, firms can also spin off
or split off assets, and existing stockholder.

Firms that want to return substantial amounts of cash to their stockholders can either pay large
special dividends or buy back stock. There are several advantages to both the firm and its
stockholders to using stock buybacks as an alternative to dividend payments. some point has to
alternative returning cash to stock holder:

Equity repurchases

An equity repurchase is a transaction whereby a company buys back its own shares from the
marketplace. A company might buy back its shares because management considers them
undervalued. The company buys shares directly from the market or offers its shareholders the
option of tendering their shares directly to the company at a fixed price.

Equity repurchases Process

A stock buyback, also known as a share repurchase, occurs when a company buys back its shares
from the marketplace with its accumulated cash. A stock buyback is a way for a company to re-
invest in itself. The repurchased shares are absorbed by the company, and the number of
outstanding shares on the market is reduced.

Reasons and Limitation

share repurchase reduces the total assets of the business so that its return on assets, return on equity,
and other metrics improve when compared to not repurchasing shares. Reducing the number of
shares means earnings per share (EPS) can grow more quickly as revenue and cash flow increase.
If the business pays out the same amount of total money to shareholders annually in dividends and
the total number of shares decreases, each shareholder receives a larger annual dividend. If the
corporation grows its earnings and its total dividend payout, decreasing the total number of shares
further increases the dividend growth. Shareholders expect a corporation paying regular dividends
will continue doing so.

Buy backs offer more flexibility and tax advantages for investors and to special dividend because
of tax benefitted companies may misuse the practice of buyback at the cost of innocent and
scattered shareholders. Buyback may be misused by promoters to enhance and consolidate their
holdings in the companies as a result of which the interest of minority shareholders may be affected
badly.

Stock split

A stock split is when a company increase the number of its outstanding shares of stock to boost
the stock affected the number of shares outstanding increases by a specific multiple, the share price
drops in proportion to that multiple, because the split does not make the company more valuable.no
cash is paid out and the split does not alter the proportional ownership of the firm.

Stock split Process

In a stock split, a company divides its existing stock into multiple shares to boost liquidity.
Companies may also do stock splits to make share prices more attractive. The total dollar value of
the shares remains the same because the split doesn't add real value. Stock splits as essential for
companies while others will find stock splits meaningless and unnecessary. In the following, we
will go through some of the pros and cons regarding both the perspective of investors and
companies when a business decides to conduct a stock split.
Reasons and limitation

1.They Don’t Change Fundamentals

Stock splits don’t affect the fundamentals and therefore the value of a company. In that aspect,
they can essentially be considered meaningless. Suppose that you have a cake and decide to cut
the cake into multiple pieces. Regardless of the number of pieces you cut the pieces into, the size
of the cake won’t change nor will the cake itself taste any different than before.

2.Stock Splits Cost Money

The process for a company to conduct a stock split from the announcement to the execution
involves time and money. In the most usual cases, a company hires a bank to plan and execute a
stock split which will then charge a fee. That fee might not be too considerably high relative to the
company’s size but can be viewed purely as a cosmetic cost that could have been used for other
purposes instead.

3.Change in Volatility

Splitting a stock reduces the value of a single share, making it easier for smaller investors to
purchase the stock. Some companies, however, don't want to make their shares easier to trade.

4.Low Price Risks

Normally, companies split stocks when things are going well and the share price is on the rise.
However, an overly aggressive split may lead to risks if the share price falls too much going
forward.

5. They may attract wrong type of investors

Stock split may choose the wrong investors which are the available for the stock split shareholder
in market.

Divestiture
in a divestiture a firm sell assets or a division to the highest bidders on the sale is received cash
that is either reinvested in a new asset or returned to stockholder as indent or stock buyback. A
divestiture is the disposition or sale of an asset by a company as a way to manage its portfolio of
assets. As companies grow, they may find they're in too many lines of business and must close
some operational units to focus on more profitable lines. Many conglomerates face this problem.

Process and follow up

Divestment is the process of selling subsidiary assets, investments, or divisions of a company in

order to maximize the value of the parent company. One divestiture strategy involves the sale of
the subsidiary or business line to another company. The parent company decides that it no longer
serves as the best owner of that portion of the business. If the divestitures value is equal of the
expected cash flow the divestitures will have no effect on the devastating. If the divestitures are
greater than the present value of expected cash flow the value of devastating firm will increase on
devastating.

Reason and limitation

A divestiture made for reasons such as short-term cash needs may have longer-term negative
consequences. If the business unit to be sold has been struggling, an alternative to selling it is to
reorganize the unit's operations. One potential disadvantage of a divestiture is the negative impact
on a company's cost structure. If the unit received significant marketing, accounting or operational
support from the parent company, it may not receive the same level of support as a stand-alone
entity or under its new owners. Some limitation that occurs divestitures

• The first limitation is that the divested asset may have a higher value to the buyers of these
asset. And buyer value of assets is higher to purchase the assessment.
• The second reason for divestitures is less value driven and more a result for immediate cash
flow needs of divestitures firm.
• Third reason for divestitures relates to the assets not sold by the firm rather than to divested
assets.

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