McCombs School of Business

FIN 370 Case Summary

You must attend class to receive credit for this assignment

Name__Eric Ma___ Case ___Gainesboro Machine Tools Corporation___ Section __TTH 11 12:30__

Case Background (who, what, when, where?):

Gainesboro Machine Tools Corporation (GMTC) was founded in Concord, New Hampshire in 1923 by friends
James Gaines and David Scarboro who were unsatisfied with their current jobs. GMTC initially designed and
manufactured machinery parts. Then in the 1980s, GMTC developed CAD software that would allow engineers
to create manufactured parts down to the exact specifications entered into the software. GMTC had previously
experienced strong earnings and dividend growth, however, GMTC sales have experienced difficulties in the
last 5 years prior to 2005. GMTC has even experienced net loss of $61,322 and $140,784 in the years 2002 and
2004 respectively. Recent events including natural disaster Hurricane Katrina has caused the stock price of
GMTC to drop 18% to $22.15 leading to the Chief Financial Officer (CFO), Ashley Swenson, to contemplate
whether or not to use company funds to pay shareholder dividends or to buy back stock.

Primary Problem and Precipitating Issue(s):

Currently, the CFO of GMTC is struggling on deciding on whether or not GMTC should buy back stock or use
company funds to pay shareholder dividends and keep them happy. The issue she faces with either buying back
stock or pay GMTCs shareholders is GMTCs recent poor performance and net loss in recent years. GMTCs
poor performance has been a continuous issue in the past 5 years.

Case Perspective (audience for the case analysis):

The audience for the case analysis would be GMTCs board of directors and management.

Decision Alternatives:
As of this moment there are two major decisions that Ashley can make. She can either buy back stock or she can
pay out dividends to shareholders.

Analyses and methodologies (how will you evaluate the problem?):

The primary goal of GMTCs management is for the firm to grow at an average annual compound rate of 15%.
GMTC is also planning on shifting production of CAD products to account for 70% of sales when it is currently
at 45% and investing in oversea markets. For these reasons I would recommend that GMTC use company funds
to buy back stock rather than paying out shareholder dividends.

Initial Recommendation and Rationale (based on your reading of the case):

GMTC should buy back stock rather than pay out shareholder dividends based on the companys future plans.
The dramatic change in production as well as oversea expansion will require money that GMTC does not
currently have. Their net loss in the prior year was $140,784. This was a result in a large decrease in sales and
the board deciding on still paying dividends to shareholders. GMTC had to borrow money in order to be able to
pay dividends and these dividends were the lowest amount ever recorded since 1990 at $0.25 a share. In
addition, because of Hurricane Katrina, the market may unfairly discount the value of GMTCs stock making it
value less than it actually is. Buying back stock allows GMTC to invest in itself and its growth, which is the
companys primary goal. Rather than making shareholders happy right now and borrowing money to help pay
for dividends, they need to use the money to help shift production and increase oversea expansion. These
opportunities will help improve GMTCs financial performance and hit the goals management wants to meet.