ABV-Indian Institute of Information Technology and

Management Gwalior (IIITM),

Gwalior

MASTER OF BUSINESS ADMINISTRATION

SUBJECT

Financial Management
Assignment 2
On
GREAT EASTERN SHIPPING CO. LTD

SUBMITTED BY: SUBMITTED TO:

ABOUT COMPANY:
The Great Eastern Shipping Company Limited is India's largest private sector shipping company
which mainly transports liquid, gas and solid bulk products. The company has two main
businesses, shipping and offshore. The shipping business is involved in transportation of crude
oil, petroleum products, gas and dry bulk commodities. The offshore business; services the oil
companies in carrying out offshore exploration and production activities through its wholly
owned subsidiary Greatship (India) Limited, which has its corporate headquarters in Mumbai.
GESCO is one of the largest private sector shipping companies in India in terms of the aggregate
dry-weight (dwt) of vessels. It was listed in Bombay Stock Exchange in 1954.

1. How has GESCO performed in the past? What is its financial structure and how has it
changed over the years? Examine the current dividend policy of the GESCO. How does
this compare with the dividend policies of Varun Shipping Company and Chowgule
Steamship?
Ans.
Part A:

Sales dipped (reason, if available in case study)

Accorging to graph sales percentage decreres from 1990-91 to 1991-92 very fastly
According to graph operating income percentage of 1990-91 increases to 1991-92

Part B

Financial structure over the years

Industry ideal debt equity ratio is 1.0 (Exhibit I) The debt to equity ratio shows a
company's debt as a percentage of its shareholder's equity. If the debt to equity ratio is less
than 1.0, then the firm is generally less risky than firms whose debt to equity ratio is greater
than 1.0.

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  D/E ratio in the FE 1990-91 was less than optimum, which means that there was less of
debt in the capital structure.
 The increasing proportion of debt in the subsequent years shows the effect of favourable
financial leverage in the EPS of the company.
EPS =( EAT-prefer Dividend)/no. Of equity shareholder

 EPS is the portion of a company’s profit that is allocated to every individual

share of the stock. Earnings per share serves as an indicator of a company's

profitability.
 The higher the earnings per share of a company, the better is its profitability.
 According to graph EPS is increases every year which means company is going
toward profitability from 1991-1993.

Part C.

 Divident Payout ratio=(DPS/EPS)*100 = 6.36/3.25 = 51.10%

 Retention ratio=(1 – dividend payout ratio) = 48.90%

Part D.

GESCO

 As according to year from FY1990-91 to FY1991-92, the EPS increases which shows
company are in profit and from Dividend payout ratio is decreases it means amount
that is not paid to shareholders is retained by the company to pay off debt or to
reinvest in core operations.
 Whereas from FY1991-92 to FY1992-93, the EPS decreases which means company
are not in profitability and dividend payout ratio is increases it means amount that is
not paid to shareholders is lost.

Varun Shipping Co.

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  As according to above table of Varun Shipping Co. in year from FY1990-91 to
FY1991-92, the EPS decreases i.e from 7.17 to 3.72 which means company are not in
profitability and dividend payout ratio is increases it means amount that is not paid to
shareholders is lost.
 Whereas from FY1991-92 to FY1992-93, the EPS increases i.e from 3.72 to 5.11
which shows company are in profit and from Dividend payout ratio is decreases from
75.27% to 54.79% it means amount that is not paid to shareholders is retained but not
that much to invest further.

Chowgule streamship

 As according to table in year from FY1990-91 to FY1991-92, the EPS increases

from 1.37 to 13.41which shows company are in good profitability condition and from
Dividend payout ratio is decreases it means amount that is not paid to shareholders is
retained by the company to pay off debt or to reinvest in core operations.

Q2. Despite the reasonable growth in earnings after tax, why the company is proposing to
reduce the dividends of the current year? What constraints will the management face in
drastically changing the dividend policy of the company? What are some of the unintended
consequences of this change?

Ans.

Part A.
 High competition
 Capital intensive industry
 Peer pressure
Since it is a growth firm, according to both the approaches (Waltor and Gordon) it should aim to
retain as much as possible to invest further.
This would in turn increase the shareholder’s wealth and trust by in increasing the market value
of the share.

Part B. According to Walter’s theory, the dividend payout in relation to (Internal Rate of
Return) ‘r’ and (Cost of Capital) ‘k’ will impact the value of the firm in the following ways:

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 Relationship between r Increase in Dividend Decrease in Dividend
and k Payout Payout
r>k Value of the firm Value of the firm
decreases increases
r<k Value of the firm Value of the firm
increases decreases
r=k No change in the value No change in the
of the firm value of the firm

In the table, r>k for the 4 years.

This model justifies the selection of GESCO to reduce the dividends. This turned into executed
to invest in addition inside the profitable commercial enterprise anticipating a better charge of
return within the future.

There is continually danger in investing extra into fixed capital. The company might not be
capable of make earnings as predicted. Environmental elements are unpredictable and might
harm the investments of the corporation.

Part C.

If the investment goes bad then

 loss of trust,
 loss of market value of share,
 decrease in investing intention.

Q3. Discuss the Chairman’s statement. Discuss the competitive environment of this
company and how does this influence the dividend policy of the company. What options the
Chairman has listed to raise the funds?

Ans.

In this statement, the chairman is justifying his employer’s selection to now not provide
dividends as a per cent of profit and approximately the benefits of the same for both the business
enterprise and the traders.

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GESCO is involved in shipping region. Shipping is a totally capital-in depth business in which
freight costs and values of ships can circulate quick. So, he believes that a transport corporation
should constantly be cash wealthy and should limit its universal borrowings to healthy its equity.
In the field phase, there has been a progressive boom in field deliver sizes from the Nineteen
Seventies. In the mid-1970s average ship sizes were 1,000 - 2,000 TEUs. This multiplied
throughout the mid-80s and early 90s while four,000 TEU panamax vessels were ordered with
the aid of maximum shipping liners. Subsequently, within the mid Nineteen Nineties post-
panamax vessels of upto 7,000 TEUs were brought.

(A TEU or Twenty-foot Equivalent Unit is an exact unit used to degree shipment potential for
box ships and field terminals.)

The industry is dominated by private ship-owners who, due to the nature of their ownership
structure, look at ship investments with a medium to long-term approach. Being independent
they neither need to concern themselves about dividend payment nor do they need to ensure
immediate returns on equity. They can retain all their earnings in the company for future growth.

The competitive nature of the industry required GESCO to upgrade or purchase new capital to be
able to remain competitive in the market. The chairman suggests that the best way to increase the
capital budget is through retained profits. The investment, according to chairman, will be
beneficial for both the parties. The investors will not lose a large share on tax (30% in this case)
and instead will get benefits of capital investment. Also, the dividend sacrificed will contribute to
the share value.

There are 4 viable assets of investment recommended by the chairman:

• There is retained income.

• Raising of clean capital from present shareholders via a rights issue.
• The raising of the capital from buyers outdoor the existing shareholders.
• Borrowings from banks and institutions.
•

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Q.4. Analyze the Chairman’s view on disadvantages of paying dividends. Do you agree
with them? Do you agree that the distribution of dividends is an ineffective way of
maximizing the shareholders wealth?
Ans.

The disadvantages of paying dividends:

 High tax rates: If the corporation provides large dividend to shareholders, the
shareholders will need to pay the taxes that are particularly excessive. If they rather
invest it into capital, it could offer higher price of go back. The corporation will even
need to incur some expenses on this transfer technique.
 Competitive role: For the dividend sacrificed through the shareholders, the cost of
percentage will increase. In the long run, the shareholders can get the blessings of the
funding.
 Structural alternate: Raising clean capital from current shareholders or elevating
capital from new shareholders will contain the corporation issuing fresh capital which
means permanent trade inside the shape of the organization.

These hazards of high taxes and expenditure is pleasant since it involves losses on each facets.
This is a waste of sources. Shipping become a competitive field with different organizations
increasing the freight capability. If the potential is not elevated and modified, GESCO will no
longer be able to maintain up with other competitors. Increasing the leverage will make the shape
much less flexible resulting in problem in acquiring funds if required inside the destiny.

Stability or regularity of dividends is considered as a applicable coverage by means of the

control of maximum businesses. Shareholders additionally generally favorable coverage and
value strong dividends better than the fluctuating ones. A cut in dividend is taken into
consideration as a reduce in revenue. The low dividend costs aren't desirable for investors who
have a quick-time period financial aim.

A organization that makes a earnings commonly has to pay business enterprise tax. Dividends
are then dispensed from their after-tax profits. The investor is then additionally typically
vulnerable to pay tax themselves, resulting in this double taxation. Investors who wanted profits
may want to realize the proper quantity of profits from their portfolio by way of selling the

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proper amount of stocks every year. Dividends don't give that flexibility as they are paid on a
according to proportion basis and so a few traders are genuinely receiving more coins than they
want.

To summarize, we will say that, dividend isn't very effective approach of growing profits as it
reasons loss to each events. Smart investors is aware of the long term benefits of decrease
dividend amounts and that they also can generate income through dealing with portfolios nicely.

CONCLUSIONS:

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