INTRODUCTION:

Gainesboro Corporation was founded in 1923 in Concord, New Hampshire, by two mechanical engineers, James Gaines and David Scarboro. The two men had gone school together and were disenchanted with their prospects as mechanics at a farm equipment manufacturer. In the early 1980s, Gainesboro entered the new field of computer-aided design and computer aided manufacturing (CAD/CAM). Working with a small software company, it developed a line of presses that could manufacture metal parts by responding to computer commands. Gainesboro merged the software company into its operations and, over the next several years, perfected the CAM equipment. At the same time, it developed a superior line of CAD software and equipment that would allow and engineer to design a part to exacting specifications on a computer. The design could then be entered into the companys CAM equipment, and the parts could be manufactured without the use of blueprints or human interference. By the end of 2004, CAD/CAM equipment and the software were responsible for about 45 percent of sales; presses, dies and molds made up 40 percent of sales; and miscellaneous machine tools were 15 percent of sales. In middle of September 2005, Ashley Swenson, chief financial officer of Gainesboro Machine Tools Corporation, paced the floor of her Minnesota office. She needed to submit a recommendation to Gainesboros board of directors regarding the companys dividend policy, which had been the subject of an ongoing debate among the firms senior managers. Compounding her problem was the uncertainty surrounding the recent impact of Hurricane Katrina, which had caused untold destruction across the southeastern United States. In the weeks after the storm, the stock market had spiraled downward and along, with it, Gainesboros stock, which had fallen from 18 percent , to $22.15. In response to the market shock, a spate of companies had announced plans to buy back stock. While some were motivated by a desire to signal confidence in their companies as well as in the U.S financial markets, still others had opportunistic reasons. Now Ashley Swensons dividend decision problem was compounded by the dilemma of whether to used company funds to pay shareholder-dividends or to buy back stock. A number of corporate objectives had grown out of the restructurings and recent technological advances. First and foremost, management wanted unexpected the firm to grow at an average annual compound rate of 15 percent. A great deal of corporate planning had been devoted to that goal over the past three years and, indeed, second-quarter financial data suggested that Gainesboro would achieve revenues of about $870 million in 2005, If Gainesboro achieved a 15 percent compound rate of growth through 2011, the company could reach $2.0 billion in sales and 160 million net income.

Gainesboros dividend and stock-price histories are presented in Exhibit 5. Before 1999, both earnings and dividends per share had grown at a relatively steady pace, but Gainesboros troubles in the early 2000s had taken their toll on earnings. Consequently, dividends were pared back in 2003 to $0.25 a share, despite reporting the largest per share earnings loss in the firms history and despite, in effect, having to borrow to pay that dividend. In the first two quarters of 2005, the directors declared their intention to continue the annual payout later in 2005.

CENTRAL PROBLEM:
What would be the most strategic, efficient and effective move that the management of Gainesboro should take in managing the firms equity that will not distort the stockholders and assures the companys future.

MINOR PROBLEMS:
1. The decline in the value of Gainesboro stocks. 2. The CEOs dilemma whether they are going to use company funds to pay shareholder dividends or to buy back stock. 3. The downgrading perception of the investment community with the company.

OBJECTIVES:
1. 2. 3. 4. 5. To gain back an even increase more the value of the companys stock. To provide Swenson a reliable guide as a way of coming up a great. To win back the investors perception on the company. To increase sales and making the company a competitive market player. To be able to bring the company in the right track in declaring dividends.

SWOT FACTORS:
STRENGTH
The founder itself. Gainesboro corporation was founded in 1923 in Concord, New Hampshire, by two mechanical engineers James Gaines and David Scarboro. This two men worked industriously with the used of their field of expertise in making Gainesboro to have a name in the market. They uses their skill, knowledge and passion in designing and manufacturing a number of machinery parts. Including metals presses, dies and molds. Due to excellent performance and quality products, Gainesboro got a name in the public. The founder itself is already strength to the company since they all know all corners of their products or innovating a new one, which makes them to compete with competitors. Strong research and development prior to year 2005. Prior to the year 2005, sales are always in increasing trend and the company really compete and give a good fight with competitors. Their products are always not lagging behind with the competitors products. Sometimes Gainesboros products may even make competitors products obsolete. And this is because of the strong research and development of the company. They continue to develop the old products by putting something that will make it different. In addition, company continues in innovating new machineries. The companys reputation After 52 years from its inception, the company had develop a reputation as an innovative producer of industrial machinery and machine tools. The company got its name now from its market. Through its reputation, newly developed and new built products can now easily enter and can be popular to the market.

WEAKNESSES:
Companys composition of investors. One of the weaknesses of Gainesboro was its composition of its investors. As illustrated in exhibit 4, the comparative stockholder data in year 1994 to 2004 shows that portfolio investors occupy a big percentage of its stocks compared growth oriented investors. This means that a significant number of investors care most of the company on its recent standing. Conflict of interest arises because of this composition. Members of the board care most about the high returns of Gainesboro in future years. While significant portion of stockholders care on what is standing of the company at current. Companys dividend policy Another weaknesses of the company was its dividend declaration practice. They will declare dividends even if the company is incurring losses. And they will pay dividends even if excess cash shows a negative balance. The company may even result to borrowings, just to pay dividends to its stockholders. And this practice is illegal and not permitted by GAAP since it violates the trust fund doctrine. This is a bad practice of the company, since they were acquiring funds through borrowings with additional expenses just to be able to pay for other expenses. The weakening of research and development. Throughout 1990s, Gainesboro helped set the standard for CAD/CAM, but the aggressive entry of large foreign firms into CAD/CAM and the rise of the U.S dollar dampened sales. In late 1990s and early 2000s technological advances and aggressive venture capitalism fueled the entry of highly specialized, state-of-the-art CAD/CAM firms. Gainesboro fell behind some of its competition in the development of userfriendly software and the integration of design and manufacturing. As a result, revenues slipped from a high of $911 million, in 1998, to $757 million in 2004.

THREATS:
The recent impact of hurricane Katrina that causes destructions across the Southeastern United States. This is a big threat for Gainesboros external environment since this shows an unpleasing market. After a week since the storm struck, the stock market had spiraled downward and, along with it, Gainesboros stock which had fallen 18 percent. The attempt to change the name of the company. This is a big threat to Gainesboro since this will make the company to start again from its inception in making a brand name. This will destroy and will make meaningless the companys reputation that was achieved for a long years of its operation in order for the management to enhance the firms visibility and image, wise management and go right dividend policy is the cure, and not a change in its name.

ALTERBATIVE COURSE OF ACTION:

The use of residual dividend payout in distributing dividends. > As given in the case facts, Swenson have three choices in which of them will be adopted in distributing dividends. But of the three, the use of residual dividend payout method is the most suitable for the companys status. Gainesboro is facing its external and internal threats for its future. Some of the threats were the economic problems in United States, recent storm that causes destruction in southeastern United States, and the conflicting interest between stockholders. In order for Gainesboro to have an assurance of its beautiful future, declaration of dividends should only be done after the appropriations done by the management. Just like as the illustration below:

The above computation shows that dividends per share is computed by dividing net income after appropriations by the management to the total number of shares outstanding legal corporation is dissolved or liquidated. While contractual appropriations arises from contract such as requirement for an acquisition of credit and the voluntary appropriation is just discretion on the management. That appropriation will be used for future requirement on the entity such as future expansion or capital fund for a future profitable venture. The above assumptions are based upon the trend movement of figures between years. In this approach, stockholders may receive less or zero dividend in the current or in the next few years. But the growth and competitiveness of the company is highly assured since monetary values that will be used in the future strategies is already solved. Besides, it is illegal to declare dividends if the company is incurring losses since it violate the TRUST FUND DOCTRINE. Giving much attention in the Research and Development > In a highly competitive market just like the market entered into the Gainesboro to top and be consistent is the challenging way. Every now and then, competitors are there, they are developing and innovating more sophisticated products than what your products have. So in order for Gainesboro to shake up with these competitive competitors in the market, they should have to innovate more beautiful, sophisticated and friendly-user machines. To have a 15% growth rate in sales cumulative every year in this type of market is too much optimism. You cannot expect consistency all year round. But in order to maintain the companys level, Gainesboro should have to focus much on researching new innovations and developing the old one with this, we can expect these following growth:
Assumptions: 1 Sales growth rate 2 Net Income sales 3 Dividend Payout 2005 12% 4% Varies upon the 2006 15% 5% Earnings per share 2007 14% 5.5% & dividends 2008 10% 6% per share

Projections: 2005 Sales Sources: Net Income Depreciation TOTAL $ 870.1 $18.1 22.5 $40.6 2006 $1,006.615 $50.33 25.5 $75.83 2007 $1,146.701 $63.07 30.00 $93.07 2008 $1,261.371 $75.68 34.5 $110.18

Uses: Capital Expenditures Change in working Capital Appropriations Total

$40.8 $19.5 $ 9 $69.3

$45.4 $22.4 $ 9 $76.8

$50.5 $25.8 $ 9 $85.3

$60.2 $29.6 $ 9 $98.8

Excess cash / Borrowing needs Dividend After Dividend Excess cash / Borrowing needs

(28.7) $.25

(.97) $.25

7.77 $7.27

11.38 $11.38

($28.95)

($1.22)

$.57

$0

As shown in the computations above, projected sales growth is expected to vary between years. Attainably there will be at 12% growth rate in the year 2005 due to development of the products company sales is presumably reach its peak to 15% at year 2006 due to development and discovery of a new product as a result of its research and will go down to 14% and 10% in years of 2007 and 2008 as a result of competitors entry in the market with new products forecast were done in the most conservative way that is attainable and will meet shareholders expectations. And in the computation of the net income and dividends, appropriations were included as provisions for the uses of fund in order for the company to always have cash that will be needed in the future. Still, the company may declare small dividends if the result of income is negative since there are expenditures that dont require any outflow of cash. But the dividends declared in the loss years will be a deduction to the excess cash in the future profitable years before dividends are to be declared. 1. Market expansion outside United States > Since reliable predictions with regards to the economy is not encouraging, Gainesboro needs to expand their market to some other places wherein the economy is stable and encouraging . They need to find places that will offset the losses incurred of the decline of sales in United States. If the company will not be able to deal with this economic challenge in its market, then surely sales will decline and incurring heavy losses just like the illustrations below:

2005 Domestic Sale International Sale Total Sales $739.585 130.515 $870.100

2006 $665.627 130.515 $796.142

2007 $599.127 130.515 $729.642

As illustrated sales will be decline over years if the company will not be able to respond immediately the external forces that may cause decline in sales. As we recall, this is very much opposite to what we are expecting of a sales increase of about 8% -15% cumulative a year. But if Gainesboro will be able to expand its market outside United States and be able to get a share in the market, we can expect for the next illustration: Possible movement of sales for market expansion
2005 Domestic Sale International Sale Total Sales $739.585 130.515 $870.100 2006 $665.627 340.988 $1,006.615 2007 $599.127 547.574 $1,146.701

Note: (amounts in thousands) As weve seen, domestic sale is continuously declining over years if economic problems in U.S will be offset by the increase in international sales as a result of market expansion and with excellent research and development, we can expect an increase in international sales over years since Gainesboro can now occupy greater market share.

2. Senior managers and members of the board should have to focus on the companys future and not on the conflicting interests of shareholders. > One thing that makes the decision makers of Gainesboro to feel difficulty in coming up decisions was the conflicting interests of shareholders. Some wants to receive higher dividends at current for the reason that it will enhance the companys image. On the other hand, others want to make available fund of the company for use in the future ventures that will surely gain profit and maintain stability. But decision makers should have to follow the second opinion of stockholders. For the reason that these stockholders are really thinking foe higher returns in the long run. While the first opinion is usually the opinion of

portfolio investors. They want for the company to declare higher dividends amidst difficulties in order to show that it is still gaining. And once it will happen, market value per share will rise and they can now dispose their shares of stocks at profit, and for them to be safe in the high risk business of Gainesboro in the future.

RECOMMENDATION:
The group have a come up to a decision to implement the four stated alternative courses of actions in a sequential form. The first course of action to be implemented is the ACA number 2 which is all about giving much emphasis in the research and development. Through this, the company will be ready to shake up the stiff market competitions through their most advanced products. The second course of action to be implemented was the ACA number 3 that is all about the companys market expansion program. Gainesboro is now ready to expand its market through their products as a result of their R & D. This would be the best way of offsetting declining sales in one area through increasing sales in its other area. The third course of action to be implemented is ACA number 4 which is all about focusing more attention on the companys profitability and stability. The decision makers needs to neglect conflicting interests of stockholders and decide the best decision for the company. And the last action to be implemented will be the ACA number 1. ACA number 1 is all about the use of residual-dividend payout in declaring dividends through this, the company can only declare dividends once there is free cash after appropriations made. Objectively, this practice cannot violate the trust fund doctrine and will not result to borrowings as a result of dividend declaration after losses.

CONCLUSIONS:
After a brief scrutiny of the given case facts and a keen analysis for the alternative courses of actions that come up as a solutions, and recommending which we think are the most effective, we strongly believe that the central problem will be solved.

CEBU ROOSEVELT MEMORIAL COLLEGES

(San Vicente St., Bogo City)

CASE STUDY
In

Accounting 16 Gainesboro Machine Tools Corporation

Submitted by:
Ronald Versaga Jasmin Lepiten Ancie Compuesto

Submitted To:
Mr. Gerardo Sayud