...Founded in 1923, the Gainesboro Corporation was originally designed as a manufacturer for various machine parts. As the years went on and technology improved they revamped the company by entering into the new field of computer-aided design and computer-aided manufacturing. The company is currently facing a tough decision as to what type of dividend to payout which has been inconsistent for numerous years. Gainesboro Corporation faces three possible dividend polices that is recommended to help the company for the years to come: zero-dividend payout, 40% dividend payout, or residual-dividend payout. In terms of zero-dividend payout, Gainesboro has the ability to use the “extra” cash to plowback to further their CAD/CAM technological advancements, since the firm has decreased their dividends from 66.5% in 1978 to 20.8% in 1999, a zero-dividend payout may not hurt the company as speculated. Second, the 40% dividend payout which always seems favorable would go in-line with the firms past dividends payouts and could even restore confidence for Gainesboro, but could possibly not benefit the company with the uncertainty in their sales and earnings for the years to come. Third, the residual-dividend payout, which states that the firm will only pay when it offers projects that have positive NPV has the potential to build trust with investors, especially with more institutional investors being value-oriented. Gainesboro will only pay dividends with any unused funds from the projects. ...
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...Gainesboro Case Study March 25, 2011 Gainesboro Case Study Solutions 1. The proposed dividend policies all have both positive and negative aspects. a. A zero-dividend policy would assist in supporting new high-tech endeavors (CAD/CAM machines) by preserving capital, as well as support sentiments of growth within the company. However, there is a possibility that value-oriented investors and those looking for steady cash flows will jump ship. b. A 40% (approx. $.20 dividend) payout policy would put the company in line with industry payout standards. In addition, it would indicate internal confidence with regards to future earnings. Unfortunately, this policy would absorb cash and possibly limit the availability of cash for future investments, especially since earnings in recent years have been sluggish, and a 15% growth rate may be considered overly optimistic. c. A residual dividend policy removes the need for added debt, and pays dividends only after all projects with positive NPVs were financed. This policy has the potential to limit increased debt, improve growth, and build investor trust. In contrast, dividends would be unpredictable, and decreases in successive dividends would put downward pressure on the share price. d. Share repurchasing would clearly instill confidence in the market by increasing EPS and share price, but would also require that Gainesboro carry more debt. 2. There are two major ways to create stock value. One is to increase share price over time...
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...cash flow, like dividends, but repurchases increase the debt-equity ratio with possible debt overhang costs. Shareholders would benefit from share repurchases as they would pay lower tax on the capital gain then they would on a dividend income payment. They could potentially find themselves to be better off with a repurchase. Shareholders would view a repurchase as positive as if the market reacts positively to announcements of dividend increases then it should also do for repurchases. Share prices traditionally rise by 3 % when firms announce open-market share repurchases. Buybacks can also signal to shareholders that the firm is underpriced; however Gainesboro could also be buying back shares from particular shareholders in order to distribute cash to insiders before revealing bad news to the market. So Gainesboro must be careful in the way it undertakes the buyback if it wants to portray positive news to shareholders. Share repurchase may also have an effect on ownership structure of the firm; this changes control and agency conditions, with an effect on value also...
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...EFB 360 Finance Capstone Case Study 2 Distribution to shareholder: Dividends and Repurchase The case of Gainesboro Machine Tool Corporation Abstract 1 Introduction 1 Dividend Irrelevance Proposition 1 Financial Flexibility 2 Agency Theory 2 Signalling Theory 3 Clientele Effects 4 The Optimal Payout Ratio 5 Share Repurchase 7 Conclusion 8 References 10 Appendices 13 Appendix 1: Detailed Calculation of Unused Debt Capacity (0%, 20%, 40% and residual payout) 13 Appendix 2: Residual Payout Calculations 15 Appendix 3: Sensitivity Analysis for Optimal Payout Ratio 16 Appendix 3.1 Debt/ Equity Ratio of 13% and 18% Annual Sales Growth 17 Abstract This paper reviews current literature to explore the financial effects of payout policy on signalling and clientele effects, as well as the financial implications of dividend and share repurchase decisions. Possible reactions that Gainesboro’s various capital providers may have to different payout policies are also examined, to determine an optimal payout policy for Gainesboro, taking into account contextual factors mentioned in the case. Findings suggest that although a 20% payout ratio is feasible, Gainesboro will most benefit from share repurchasing this quarter. Introduction Gainesboro Machine Tool Corporation has a tradition of strong earnings and predictable growth. However since 2000, dividends have started to outgrow earnings. By the first half of 2005, they have not declared dividends yet but...
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...Gainesboro Machine Tools Corporation In this case we analyze the impact of an external issue (hurricane Katrina) on the dividend policy of the company. Ashley Swenson, CFO of Gainesboro Machine Tools Corporation, needs to decide whether to buy back stock or pay dividend to shareholders, considering the significant drop after the storm and the possibility of a significant increase in the near future. She should recommend one of these three policies: Zero dividend payout, 40% dividend payout (dividend of around $0.20 a share) or residual dividend payout). Ashley should also position herself regarding the image advertising and name change to Gainesboro Advanced Systems International, seeking to enhance firm visibility and image. When deciding the dividend policy, Ashley must keep in mind that the firm’s objective is to maximize shareholders value. However, if the firm increases dividends, there will be less money available for reinvestment. Therefore, when setting the optimal dividend policy, Ashley should face a trade-off between current dividends and future growth in order to maximize the firm’s stock price. Considering the total values of Sources, Uses, dividends and excess cash, we have: Using these total values, we can simulate proposed dividend payouts and compare them to other companies in the CAD/CAM market and also in the electrical and machinery markets: Analyzing the table above, Ashley should opt for the zero-dividend pay-out policy because it would strengthen...
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...Statement of the Problem Established in 1923, Gainesboro Machine Tools Corporation (Gainesboro) started out manufacturing machinery parts but by the 1980s started to pioneer in the industry of computer aided design (CAD) and computer aided manufacturing (CAM). Competition ramped up in the 1990s and Gainesboro’s revenues per share declined by 16% from 1998-2004 (Exhibit 5). The company restructured itself and focused more resources on innovation. By late 2004 the company started to turn around its attrition with a positive growth outlook. In August 2005, Ashley Swenson, the Chief Financial Officer of Gainesboro, was considering 3 dividend policies to implement; a zero-dividend payout, a 40% dividend payout or $0.20 a share, or a residual dividend payout. Discussion Dividend Policy Choices 1. Zero-dividend payout: This option of not paying a dividend allows Gainesboro to invest their earnings into the expansion of their advanced technologies such as CAD and CAM. The company can use their earnings to create new technologies and lines of businesses. This gives investors and employees a clear sign that the company is making changes to stay competitive by transitioning from a machine parts manufacturer to a high technology innovator. 2. 40% dividend payout or a dividend of $0.20 a share: This option gives a 40% dividend payout implying an annual dividend of $0.80 a share. This could reassure investors that the company was back on its feet and optimistic of future earnings. Investors...
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...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%)...
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...GAINESBORO MACHINE TOOLS CORPORATION Teaching Note Synopsis and Objectives Other cases in which dividend policy is an important issue: “Deutsche Brauerei,” (Case 11) In mid September 2005, Ashley Swenson, the chief financial officer (CFO) of a large computer-aided design and computer-aided manufacturing (CAD/CAM) equipment manufacturer needed to decide whether to pay out dividends to the firm’s shareholders, or to repurchase stock. If Swenson chose to pay out dividends, she would have to also decide upon the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising, and change its corporate name to reflect its new outlook. The case serves as an omnibus review of the many practical aspects of the dividend and share buyback decisions, including (1) signaling effects, (2) clientele effects, and (3) the finance and investment implications of increasing dividend payouts and share repurchase decisions. This case can follow a treatment of the Miller-Modigliani dividend-irrelevance theorem and serves to highlight practical considerations to consider when setting a firm’s dividend policy. Suggested Questions for Advance Assignment to Students The instructor could assign supplemental reading on dividend policy and share repurchases. Especially recommended are the Asquith and Mullins article on equity signaling, and articles by Stern Stewart on financial communication. 1. In theory, to fund an increased...
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...Read and Download PDF File Teletech Corporation Case Study Solution PDF Ebook Library TELETECH CORPORATION CASE STUDY SOLUTION Download: TELETECH CORPORATION CASE STUDY SOLUTION / PDF Teletech Corporation Case Study Solution in addition to the lessons as well as textbooks are basically 2 sides of the very same coin. The classes as well as textbook assist you construct a strong structure on which to be analyzed on. Teletech Corporation Case Study Solution on the other hand, allow you to place this expertise to practical usage. Teletech Corporation Case Study Solution allows you to create in all the relevant locations. The wonderful aspect of Teletech Corporation Case Study Solution are their cost. They are not horribly expensive and evaluating that against their worth, you could not actually pay for to be without them. They are excellent for bringing a context to the course and also aiding you establish your understanding of the training course as a whole. The other alternative which is much less preferable is to examine the program in a bit-by-bit way which is a danger when it pertains to evaluation day. Doing this is likely to leave gaps in your understanding of the program. Utilizing the Teletech Corporation Case Study Solution assists draw all this know-how together into a relevant context and also it is fundamental in developing a further understanding of the topic. One more fantastic aspect of Teletech Corporation Case Study Solution are that taking a particular...
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...Case #25 Gainesboro Machine Tools Corporation Synopsis and Objectives In mid September 2005, Ashley Swenson, the chief financial officer (CFO) of a large computer-aided design and computer-aided manufacturing (CAD/CAM) equipment manufacturer needed to decide whether to pay out dividends to the firm’s shareholders, or to repurchase stock. If Swenson chose to pay out dividends, she would have to also decide upon the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising, and change its corporate name to reflect its new outlook. The case serves as an omnibus review of the many practical aspects of the dividend and share buyback decisions, including (1) signaling effects, (2) clientele effects, and (3) the finance and investment implications of increasing dividend payouts and share repurchase decisions. This case can follow a treatment of the Miller-Modigliani[1] dividend-irrelevance theorem and serves to highlight practical considerations to consider when setting a firm’s dividend policy. Suggested Questions 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? 2. What happens to Gainesboro’s financing need and unused debt capacity if: a. no dividends are paid? ...
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...The net sales of Gainesboro Machine Tools Corporation fell by 5% from $858,263,000 to $815,979,000 in 2003 and 7% from $815,979,000 to $756,638,000 in 2004. These drops in sales are not surprising because the company was going through a restructuring phase. There sales are then projected to increase to $870,000,000 in 2005, this would be an increase of around 6.5%. This projection can be contributed to the company’s new Artificial Workforce products. The company expected domestic revenues from these products to total $90M in 2005 and $150M in 2006. They had also expected to receive $150M in revenue from international sales by 2007. The companies cost of sales has dropped in both 2003 and 2004, this makes sense and is consistent with the drop in sales over these years. Although from 2003 to 2004 their sales dropped 7% and their cost of sales only dropped .50%. This does not look good and will effect gross profits. The company’s gross profits weren’t effected much in 2003, dropping from $317,516,000 to $314,522,000 is only a drop of less than 1%, but in 2004 the company took a huge hit to their gross profit. In 2004 the company experienced an 18% loss to their gross profit dropping from $314,522,000 to $257,759,000. This is caused by the big drop and sales and little change in cost of sales, and can be a cause for concern. Even with this big hit to gross profit Gainesboro expects gross profits to jump back to normal in 2005. The selling, general & administrative costs of the...
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...remain fixed as a matter of the company’s policy? 2. What happens to Gainesboro’s financing need and unused debt capacity if: a. no dividends are paid? b. a 20% payout is pursued? c. a 40% payout is pursued? d. a residual payout policy is pursued? Note that case Exhibit 8 presents an estimate of the amount of borrowing needed. Assume that maximum debt capacity is, as a matter of policy, 40% of the book value of equity. 3. How might Gainesboro’s various providers of capital, such as its stockholders and creditors, react if Gainesboro declares a dividend in 2005? What are the arguments for and against the zero payout, 40% payout, and residual payout policies? What should Ashley Swenson recommend to the board of directors with regard to the long-term dividend payout policy for Gainesboro Machine Tools Corporation? 4. How might various providers of capital, such as stockholders and creditors, react if Gainesboro repurchased its shares? Should Gainesboro do so? 5. Should Swenson recommend the corporate-image advertising campaign and corporate name change to the Gainesboro’s directors? Do the advertising and name change have any bearing on the dividend policy or the stock repurchase policy that you propose? You are required to present your case analysis both orally (presentation) and in writing (report format). Note: - 1. This is an individual assignment. 2. Be mindful of the danger of plagiarism. Referencing and bibliography are expected if any of your assignment is borrowed...
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...Mark Twain Samuel Langhorne Clemens, better known as Mark Twain, is perhaps the most distinguished author of American Literature. Next to William Shakespeare, Clemens is arguably the most prominent writer the world has ever seen. In 1818, Jane Lampton found interest in a serious young lawyer named John Clemens. With the Lampton family in heavy debt and Jane only 15 years of age, she soon arried John. The family moved to Gainesboro, Tennessee where Jane gave birth to Orion Clemens. In the summer of 1827 the Clemenses relocated to Virginia where John purchased thousands of acres of land and opened a legal advice store. The lack of success of the store led John to drink heavily. Scared by his addiction, John vowed never to drink again. Even though John now resisted alcohol, he faced other addictions. His concoction of aloe, rhubarb, and a narcotic cost him most of his savings and money soon became tight (Paine 34-35). The family soon grew with the birth of Pamela late in 1827. Their third child,Pleasant Hannibal, did not live past three months, due to illness. In 1830 Margaret was born and the family moved to Pall Mall, a rural county in Tennessee. After Henry's birth in 1832, the value of their farmland greatly depreciated and sent the Clemenses on the road again. Now they would stay with Jane's sister in Florida, Missouri where she ran a successful business with her husband. Clemens was born on November 30, 1835, in the small remote town of Florida, Missouri. Samuel's parents...
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...The University of Lethbridge Calgary Campus Faculty of Management Management 4430Y Financial Management Spring 2011 A.P. Palasvirta Office: Markin 4132, Lethbridge Phone: (403) 332-4582 e-mail: oz.palasvirta@uleth.ca Goal of Course Management 4430 is the capstone course in finance and will incorporate concepts you have learned in through your study of corporate, investments, and international. We will utilize the case methodology to focus our analysis. Cases describe a context in which a particular problem is found. Regardless of the particular characteristics of the problem, problem solving follows a general methodology: identification of the problem, describing the context of the problem, analysis of potential alternative solutions, the identification of the best solution, implementation of the best solution , and the creation of controls and contingency plans, if applicable. Text and Other Sources: E-book based on Case Studies in Finance, 6th ed., 2010, McGraw Hill, Toronto, ISBN Prerequisites Management 3412, Fundamentals of Investments Investments, Analysis & Management, 2nd Canadian Ed., 2005, Cleary & Jones, John Wiley & Sons Canada Ltd., Mississauga ISBN 0-470-83542-7 Management 3460, Corporate Finance Fundamentals of Corporate Finance, 6th Canadian Ed., 2007, Ross, Westerfield, Jordan, & Roberts, McGraw-Hill Ryerson, Toronto ISBN 13: 978-0-07-095910-1 A list of topics for which you should have working knowledge...
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...University of South Carolina Moore School of Business FINA 761 (800): Advanced Corporate Finance Fall 2013 Instructor: Eric Powers |Class time: |T/TH 2:50 – 5:35 | |Location: |364 | |Office Hours: |TBD | |Office Hour Location: |BA 462 | |E-mail: |epowers@moore.sc.edu | |Course website: |blackboard.sc.edu | The objective of this course is deepen your understanding of the many issues faced by firms as they identify valuable investment opportunities, raise funds for those investment opportunities, distribute profits to share-holders and debt-holders and deal with the consequences of both good and bad investment financing decisions. We will expand on the concepts that you have learned in FINA 760 or in DMSB 715. Class time will be divided between lectures and case studies. My lectures will briefly review concepts from prior courses. The bulk of my lectures will present advanced material that will be new to you. It is assumed that you understand the concepts from your earlier finance and accounting courses. If not, it is your responsibility to review. In order to reduce your note-taking, my lecture notes will be available...
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