1) What are two reasons why FPL should cut the dividend? Don't just give generic answers, tie your response to something specific related to FPL in the case - show that you read the case itself. Each explanation has to include at least one number. 2) What are two reasons why FPL should either keep the dividend unchanged, or, increase it just a little? (Same rules as above - relate the reasons to a specific fact or calculation in the case.) And, because it would be fun to see the vote, the following "ungraded" question: 3) Answer in one sentence: what should Kate Stark do, and why?

Case Study: In the late afternoon of Thursday, May 5, 1994, Kate Stark, the electric utilties analyst at First Equity Securities Corporation, received an investment alert on one of the companies she fellowed. According to the report, Merrill Lynch's utilties analyst was dwongrading FPL Group, Inc., Florida's largest electric utiltiy. The report began: "We are [lowering] the investment rating for FPL Group... due to our expectation that the Directors will choose not to raise the annual divident from $2.48 at [the annual meeting on] May 9th. FPL's sharehodlers face the possiblity that the divdent is not entirely secure, as we believe FPL may seriously review its dividend policy at this time... Management has suggested that it feels that its divident payout is inappropriately high (in excess of 90% in 1993) given the increasing risks facing the industry... when asked specifically what might be done about the high dividend payout levels, amagement suggested that there are two ways to address high payout levels: 1) a company can grow out of a high payout; 2) a company can cut its dividen... we expect the company to keep the divdent at the $2.48 per share level through 1997." Although this analyst was predicting the dividend would not change, this was the first time Stark had seen one of her peers suggest the possibility of a divident cut. Only three weeks earlier, Stark herself had issued a report on FPL Group with a "hold" recommendation based on the assuption that FPL would keep its divident at $2.48 per share or increase it slightly. What concerned her, however, was the fact that FPL's stock price had fallen by more than 6% that day. While she could not be sure the drop was related to the report, she wondered what, if anything, she should say to her clients regarding FPL's stock and whether she should issue an updated report.