The best estimate for 2006 are shown in the projections for Alliance Concrete. The company is expected to grow its Net Income by $2,350 million. If the company was to pay $3 million in dividends, it would be $11,349 million in retained earnings. If you make no investment in capital expenditure and make payments to your bank loan, the loan would come down to $57,660 million. If the company does not reinvest, it will be at a 50% chance of a problem occurring, which can cause more losses. Just as they did in 2004, not only did it cost $2.6 million to fix the problem but also the company had to close down for 2 weeks, hence the drop in sales for 2004. My recommendation to Alliance Concrete would be to pay off the $7,000 million obligation to the bank which is owed. This would be suggested so you do not default on a loan. It would also put you at the borrowing limit as well. If the company does default on the loan, it will not be a good look for the company. Stock prices and confidence in the company will drop, as people will think that the company cannot pay its bill.
After paying off the debt to the bank, I would suggest to allocate the rest of the money towards capital expenditure. It will be necessary for the company to upgrade at least some of the equipment to lower the possibility of something going bad. It would be a total nightmare if the company ran into another problem like the one they faced in 2004, and it may lead to bankruptcy. They may not be able to recover because their debt would go through the roof. That being said, I would skip on the dividend payments and insure that the following year there will be a bigger payment to the stockholder, if everything goes well. The investment into the company would make the company operate better and may even generate more revenue.
If I was to renegotiate with the bank, I would put forward the projection of growth. I would highlight the increase in sales and revenue along with showing the effort to pay down the banks loans. I would put forward the current and quick ratio, showing that we have enough money to liquidate the assets to cover our debt in worst case scenario. The company can argue that, even though the real estate market is slowing down, the company is still showing growth, which is a good sign.
If Alliance Concrete was to skip on dividend payments the argument that can be put forth would be that the company is growing and shows signs of great improvement, if we put money into it now. Also that, investment now in the company could mean even more dividend payments in the future. We could also argue that it needs to be skipped because the company needs to put back money into itself because we need to get repairs done. If we pay dividends now, it may not be the best for the company, because we will not be able to get the repairs done that are needed and will cost us more to fix and recover from that problem.
After carefully looking at all aspects and possible situations I would suggest that the company skip on the dividends for this year, and invest its money back into the company along with paying of some of the debt. This will be beneficial for all. It will make the company grow all with paying of its loans. The stockholders can be assured that the company is growing and that there will be better dividend payments in the future.