Southeastern Steel Company (SSC) was formed 5 years ago toexploit a new continuous-casting process. SSC’s founders,Donald Brown and Margo Valencia, had been employed in the researchdepartment of a major integrated-steel company, but when thatcompany decided against using the new process (which Brown andValencia had developed), they decided to strike out on theirown. One advantage of the new process was that it requiredrelatively little capital in comparison with the typical steelcompany, so Brown and Valencia have been able to avoid issuing newstock, and thus they own all of the shares. However, SSC hasnow reached the stage where outside equity capital is necessary ifthe firm is to achieve its growth targets yet still maintain itstarget capital structure of 60 percent equity and 40 percentdebt. Therefore, Brown and Valencia have decided to take thecompany public. Until now, Brown and Valencia have paidthemselves reasonable salaries but routinely reinvested allafter-tax earnings in the firm, so dividend policy has not been anissue. However, before talking with potential outsideinvestors, they must decide on a dividend policy.
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