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What's In This Issue–A Message From The Editor

What's In This Issue–A Message From The Editor dividend choices as follows: For highgrowth firms, the underinvestment problem caused by heavy debt financing and the flotation costs associated with high dividends make both policies potentially very costly. But, for well-established companies with limited growth opportunities (and here the argument goes beyond Myers’ 1977 paper), high leverage and dividends can actually have major benefits by controlling a managerial tendency to “overinvest” known as the free cash flow problem. In our second article, “Financial Policy As A Catalyst For Organizational Change,” Harvard Business School’s Karen Wruck presents a case study of Sealed Air Corporation’s leveraged restructuring that illustrates both the free cash flow problem and the potential role of debt financing in correcting it. The story in brief is this: Although Sealed Air was producing steady increases in EPS throughout the ’80s, its operating performance as measured by other indicators (operating margins, working capital, turnover ratios, etc.) was mediocre and its stock price was underperforming market averages. With $55 million in cash and marketable securities, but only $33 million in total debt and no promising investment opportunities, Sealed Air was generating far more cash than it could profitably reinvest in the firm. And though patents on some of http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Corporate Finance Wiley

What's In This Issue–A Message From The Editor

Journal of Applied Corporate Finance , Volume 7 (4) – Jan 1, 1995

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Publisher
Wiley
Copyright
Copyright © 1995 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1078-1196
eISSN
1745-6622
DOI
10.1111/j.1745-6622.1995.tb00258.x
Publisher site
See Article on Publisher Site

Abstract

dividend choices as follows: For highgrowth firms, the underinvestment problem caused by heavy debt financing and the flotation costs associated with high dividends make both policies potentially very costly. But, for well-established companies with limited growth opportunities (and here the argument goes beyond Myers’ 1977 paper), high leverage and dividends can actually have major benefits by controlling a managerial tendency to “overinvest” known as the free cash flow problem. In our second article, “Financial Policy As A Catalyst For Organizational Change,” Harvard Business School’s Karen Wruck presents a case study of Sealed Air Corporation’s leveraged restructuring that illustrates both the free cash flow problem and the potential role of debt financing in correcting it. The story in brief is this: Although Sealed Air was producing steady increases in EPS throughout the ’80s, its operating performance as measured by other indicators (operating margins, working capital, turnover ratios, etc.) was mediocre and its stock price was underperforming market averages. With $55 million in cash and marketable securities, but only $33 million in total debt and no promising investment opportunities, Sealed Air was generating far more cash than it could profitably reinvest in the firm. And though patents on some of

Journal

Journal of Applied Corporate FinanceWiley

Published: Jan 1, 1995

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