CASE STUDY 3 (15%)

Case 3: Gainsboro Machine Tools Corp (GMTC)

Read the following about GMTC (GMTC). The questions posed to you are: -

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?

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 from any particular