1.In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock. Which of those three elements is Gainesboro's management willing to vary, and which elements remain fixed as a matter of the company's policy?

Gainesboro wants to increase value to shareholders but also keep paying dividends. However, the company's main concern is the debt to equity ratio. The cap Gaineboro set is at 40% and anything over this percentage is “unthinkable, indicative of sloppy management, and flirting with trouble” according to co founder David Scarboro. In 2004, the company had the highest debt to equity ratio in the past 25 years at 22% which was still a discussion among senior management. Because of the company being so fixed on debt I think it is an unlikely the funds for 2005 will be used to finance dividends they promised. I do not think it should be an option at all, but I think their promise needs to be reevaluated.

Based on the history of this company paying equity to debt financing I am assuming that they will continue to issue more stock to finance the dividend versus the borrowing. Gaineboro new Artificial Workforce seems promising and this might be the last big leap for this company financial for a while. So base on this information I believe the company will issue more stock.

2.What happens to Gainesboro's financing need and unused debt capacity if:
Figuring the cost of debt (after-tax) is 6.5% (pre-tax 10%) and I picked 35% for a selected tax rate. I weighted the P/E ratio to reflect what was stated in the case that 75% of earning would come from the new projects (Artificial Workforce) and 25% from traditional molds and presses.

a. no dividends are paid?
Making a promise to shareholders and no delivering the promise happens all the time and it does not always mean for a negative market