As the Torstar board meeting in April of 1998 was approaching, a memorandum on Torstar’s dividend policy, their repurchases and their strategy with regards to strategic acquisitions within their three business areas was composed. The memorandum included pros and cons as well as recommendations with regards to the issues to be discussed when the board gathered for their meeting. The dividend policy and the share repurchase strategy are the main issues since the institutional shareholders preferred Torstar’s historical share repurchases and historical dividend pay outs. Management has during the last years focused on acquisitions, especially in order to diversify their business through the children’s supplementary education products (CSEP) …show more content…

This is supported by the fact that Torstar’s Tobin Q-ratio is relatively low at 0,46. Officer (2011) provides evidence that companies with high cash flows and low Q-ratios will benefit more from an increased dividend than companies with high Q-ratios. Torstar is a mature company and is viewed by the market to have few positive NPV opportunities. Torstar holds a substantial amount of cash ($48m.) and is viewed by the market to have limited investment opportunities which would, according to Faulkender and Wang (2006), place Torstar in to a a certain regime of companies. This regime has a decreasing marginal value of an additional dollar in cash holdings which has a negative effect on the market value. Dividends are sticky, meaning that cutting dividends signals decreased earnings and therefore goes hand in hand with high adverse selection costs. As stressed by Lintner (1956), it is important to target long-term payouts so the risk of negative changes in dividends is reduced. Hence, increased dividends would constrain Torstar managers in the future. A way to mitigate agency problems is cutting available cash and reducing liquidity. However, it could have a negative impact on Torstar by decreasing future capital expenditure and increasing the risk of financial distress. However, Torstar has an Altman Z-Score of 3.4, which indicates that Torstar is not in financial distress at all in 1997. All else equal, a 30% D/TA ratio

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