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Welcome to Our Presentation on

GAINESBORO MACHINE TOOLS


CORPORATION
GROUP MEMBERS
Name ID No.

Syeda Farzana Mahbub 11-059


Nahin Ashrafi 11-061
Kazi Monira Akter 11-062
Khaled Mahmood 11-076
Nusrat Jahan Tithi 11-110
COMPANY PROFILE

Founded in 1923 in Concord, Hampshire.

Products and business: Machinery parts,


armored vehicle, war equipments, industrial
presses, machinery and tools, computer-aided
design and manufacturing.
QUESTIONS TO BE ANSWERED
PRESENT SITUATION AND DILEMMA
THE DIVIDEND QUESTION
Faltering in the past 5 years.
Two extensive restructuring programs.
2000-2002, dividends exceeded earnings.
2003- dividends were decreased to a level below
earnings.
2004- small dividends were declared.
First 2 quarters of 2005- no dividends.

The board has announced to resume payment of


dividend sometime in 2005.
CORPORATE-IMAGE ADVERTISING

Changing the name of the corporation to


“Gainsboro Advanced Systems International,
Inc.”

“Would a change of name help to positively


frame investors’ views of the firm?”
STOCK BUYBACK OR DIVIDEND
In response to market shock because of Hurricane
Katrina, many companies have announced buying
back of stocks.
Ashley Swenson’s dividend-decision problem has
been intensified by the dilemma of choosing
between to pay shareholder dividends or to buy
back stock.

“Would a stock buyback instead of a dividend


affect investors’ perceptions of Gainsboro in
anyway?”
ECONOMY ANALYSIS
ECONOMIC FACTORS
Macroeconomic environment.
Uncertainty surrounding recent destructive impact of
Hurricane Katrina.
Aggressive entry of large foreign firms into CAD/CAM.
Significant improvement of industrial production since
2001 that indicates a trend slightly downward in the next
few years.
Increasing real gross domestic product.
Highly fluctuating prices of finished goods.
Large increase in industrial production in the last 4 years.
Stable level of consumer spending and GDP deflator.
INDUSTRY ANALYSIS
-It requires a huge investment to
-Volume of purchase is Threats of enter into the industry.
significant. new -Barriers to entry are low due to
-Many Suppliers are available. entrants- fragmented nature of the
MODERATE industry.
Rivalry
Bargaining
among
power of
existing
suppliers-
competitors-
MODERATE
HIGH

-Competitors are strong


-There is low switching Threats of and dominating.
Bargaining
cost. substitute -Highly competitive
power of
-Low product products- machinery industry.
buyers-HIGH
HIGH -Difference between
differentiation.
the products are not
that great.
Similar products are available.
Many firms producing machineries
and industrial products.
SOWT ANALYSIS
TECHNOLOGICAL FACTORS/ STRENGTHS
Innovative producer of industrial machinery and
machine tools.
Entering into new field of computer-aided design
and computer-aided manufacturing (CAD/CAM).
Development of superior line of CAD software and
equipment.
Developing superior line of CAD software and
equipment.
A true industry leader among the small local firms
with limited customers in the CAD/CAM industry.
PROBLEMS/ WEAKNESS OPPORTUNITIES

 Fell behind in competition in  Devotion of greater share of


the development of use- R&D budget to CAD/CAM.
friendly software.  Successful introduction of
 Delayed production growth the Artificial Workforce
due to manufacturing series.
mishaps and missing  Expanding international
components. market.
 High start-up costs.  Development of products in
the chemicals industry.
THREATS

Competition from large firms like Autodesk,


Inc., Cadence Design.
The aggressive entry of large foreign firms.
Market shock due to hurricane Katrina and
falling of stock prices.
Losses from two massive restructurings.
RATIO ANALYSIS
PROFITABILITY
RATIOS
40
•Higher or increasing gross
margins for Gainesboro reflect 30
greater efficiency in turning raw
materials into income. 20
•Lower profit margins indicate a
low margin of safety for the co.: 10
higher risk that a decline in sales
will erase profits and result in a 0 2003

net loss, or a negative margin. Gross


margin
Profit
margin
Return on
equity
Return on
net assets
Return on
assets
Operating
margin
2004
2005
•Lower operating margin -10
indicates high financial risks for
the co. -20

•The co’s very low return on


equity shows the co. has been -30

unable to use its funds to


generate growth. -40

•Gainesboro’s poor return on


-50
assets indicates its inability to
generate revenues from the
assets it owns.
LEVERAGE RATIOS
Gainesboro’s debt ratios are 60
moderately high and have an
increasing trend. That 50
indicates the co.’s frequent
use of debt to collect assets. 40
Lower ratios indicate the co’s
low amount of long term 30
2003
2004
debt in proportion of 2005
shareholders’ equity. 20

10

0
Debt ratio (%) Debt/equity ratio Long term debt to Financial
(%) equity leverage
MARKET RATIOS
Gainesboro’s EPS increased
in year 2005 from a negative
earning in 2004. 5

Dividend cover increased in 0


2005 but it’s less than the 2003 2004 2005

figure of year 2003. -5

-10
EPS
-15 Dividend cover

-20

-25

-30

-35
LIQUIDITY RATIOS
The liquidity ratios have been
decreasing for Gainesboro 2.5
which is a very alarming sign
for the company indicating
its inability to meet its 2

current liabilities and


payments through current 1.5
assets. It threatens the Current ratio
Quick ratio
company’s financial position Cash ratio
because of its poor liquidity 1

condition. It indicates its


running out of cash or liquid
0.5
assets.

0
2003 2004 2005
ACTIVITY RATIOS
Decreasing asset turnover
ratio indicates the company’s 180

failure to generate enough 160


revenue from its assets. 140

Inventory turnover has been 120


stable though the figures are 100
minimal indicating the 80
company’s inability to
60 2003
convert its inventories to 2004
40
sales. 2005
20
The figures are quiet high
0
and have been stable that
means it takes a long time
for Gainesboro to collect its
receivables.
DUPONT ANALYSIS
2003 2004 2005
Net Profit AT/Sales 1.59% -18.61% 2.07%
Sales/Total Assets 120.96% 117.82% 120.61%
ROA 1.93% -21.92% 2.50%
Net Profit AT/Total Assets 1.93% -21.92% 2.50%
Total Assets/Stockhldrs.
Equity 168.15% 227.30% 240.35%
ROE 3.24% -49.83% 6.00%
RISK ANALYSIS
BUSINESS RISK
Net income volatility
Mean -140785
STD 76902.87
CV 0.54624

Sales volatility

Mean 756638
STD 51050.52
CV 0.06747
DOL

2002 2003 2004


Net sales 858263 815979 756638
% change in sales -0.04927 -0.07272

Net income (loss) -61322 12992 -140785


% change in net income -1.21187 -11.8363

DOL 24.59794 162.7569


FINANCIAL RISK

2002 2003 2004 2005

Net income (loss) -61322 12992 -140785 18018


% change in net income -1.21187 -11.8363 -1.12798

EPS -3.25 0.69 -7.57 0.98


% change in EPS -1.21231 -11.971 -1.12946

DFL 1.000365 1.011383 1.001309


BANKRUPTCY RISK

Z score
Weight 2003 2004
WC/TA 1.2 0.41 0.25
RE/TA 1.4 0.43 0.23
EBIT/TA 3.3 0.03 -0.21
MVE/TL 0.6 4.23 1.53
SALES / TA 1 1.21 1.18
4.94 2.00
SIMULATION
DIVIDEND DECISION
There are three main factors that may influence
a firm's dividend decision:
Free-cash flow
Dividend clienteles
Information signaling
THE FREE CASH FLOW THEORY OF DIVIDENDS

The firm simply pays out, as dividends, any


cash that is surplus after it invests in all
available positive net present value projects.
DIVIDEND CLIENTELES

Shareholders who pressure a company to


follow a certain dividend policy, usually in order
to minimize their own tax liability. Often, the
dividend clientele asks the company to change
the schedule of dividend payments to that
which is most favorable to them. However,
these policies are not always in the best long-
term interests of the company.
INFORMATION SIGNALING
Dividend announcements convey information to investors regarding the
firm's future prospects. Stock prices tend to increase when an increase
in dividends is announced and tend to decrease when a decrease or
omission is announced.
Managers have more information than investors about the firm, and
such information may inform their dividend decisions. When managers
lack confidence in the firm's ability to generate cash flows in the future
they may keep dividends constant, or possibly even reduce the amount
of dividends paid out.
Conversely, managers that have access to information that indicates
very good future prospects for the firm (e.g. a full order book) are more
likely to increase dividends.
PROBLEM STATEMENTS
What is the market view towards Gainesboro?
 a company on the wane
 a blue chip stock
 a potential growth
What happens to Gainesboro’s financing need and unused debt capacity if:
 no dividends are paid?
 a 20% payout is pursued?
 a 40% payout is pursued?
 a residual payout policy is pursued?
How the various providers of capital of Gainesboro, such as its stockholders
and creditors may react at different level of dividend payout?
Would a stock buyback instead of dividend affect investors’ perceptions?
Would a change of name help to positively frame investor’s view of the firm?
 What is the market view towards Gainesboro?
a company on the wane
a blue chip stock
a potential growth
Criteria Bluechip Co. on wane Potential Gainseboro
growth
Revenue High low High growth High growth

Earnings Consistent Fluctuate Accelerate moderate

Market size Higher Low Huge Large

Competition Cost efficient niche Market Cost efficient


dominance
Product portfolio Diversified Limited Diversified Diversified

Dividend Regular irregular Low Moderate


What happens to Gainesboro’s financing need and unused debt capacity if:
no dividends are paid?
a 20% payout is pursued?
a 40% payout is pursued?
a residual payout policy is pursued?
0% DIVIDEND PAYOUT
0% of dividend payout 2005 2006 2007 2008 2009 2010 2011
Sales Growth Rate 15% 15% 15% 15% 15% 15% 15%
Net Income as % of sales 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%
Diveidend-Payout Ratio 0% 0% 0% 0% 0% 0% 0%

2005 2006 2007 2008 2009 2010 2011


Sales 870.1 1000.7 1150.8 1323.4 1521.9 1750.1 2012.7
Sources:
Net Income 18.1 40.0 57.5 72.8 91.3 98.0 160.0
Depreciation 22.5 25.5 30 34.5 40.5 46.5 52.5
Total 40.6 65.5 87.5 107.3 131.8 144.5 212.5

Uses:
Capital Expenditures -43.8 -50.4 -57.5 -66.2 -68.5 -78.8 -90.6
Change in working capital -19.5 -22.4 -25.8 -29.6 -34 -38.5 -44.3
Total -63.3 -72.8 -83.3 -95.8 -102.5 -117.3 -134.9

Excess Cash/ Borrowing Needs -22.7 -7.3 4.2 11.5 29.3 27.2 77.6
Dividend 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total excess cash/borrowing -22.7 -7.3 4.2 11.5 29.3 27.2 77.6

Dividend per share 0.0 0.0 0.0 0.0 0.0 0.0 0.0
40% DIVIDEND PAYOUT
40% of dividend payout 2005 2006 2007 2008 2009 2010 2011
Sales Growth Rate 15% 15% 15% 15% 15% 15% 15%
Net Income as % of sales 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%
Diveidend-Payout Ratio 40% 40% 40% 40% 40% 40% 40%

2005 2006 2007 2008 2009 2010 2011


Sales 870.1 1000.7 1150.8 1323.4 1521.9 1750.1 2012.7
Sources:
Net Income 18.1 40.0 57.5 72.8 91.3 98.0 160.0
Depreciation 22.5 25.5 30 34.5 40.5 46.5 52.5
Total 40.6 65.5 87.5 107.3 131.8 144.5 212.5

Uses:
Capital Expenditures -43.8 -50.4 -57.5 -66.2 -68.5 -78.8 -90.6
Change in working capital -19.5 -22.4 -25.8 -29.6 -34 -38.5 -44.3
Total -63.3 -72.8 -83.3 -95.8 -102.5 -117.3 -134.9

Excess Cash/ Borrowing Needs -22.7 -7.3 4.2 11.5 29.3 27.2 77.6
Dividend 7.2 16.0 23.0 29.1 36.5 39.2 64.0
Total excess cash/borrowing -29.9 -23.3 -18.8 -17.6 -7.2 -12.0 13.6

Dividend per share 0.4 0.8 1.3 1.6 2.0 2.1 3.5
RESIDUAL DIVIDEND PAYOUT
Residual dividend payout 2005 2006 2007 2008 2009 2010 2011
Sales Growth Rate 15% 15% 15% 15% 15% 15% 15%
Net Income as % of sales 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%
Diveidend-Payout Ratio 0% 0% 0% 0% 0% 0% 0%

2005 2006 2007 2008 2009 2010 2011


Sales 870.1 1000.7 1150.8 1323.4 1521.9 1750.1 2012.7
Sources:
Net Income 18.1 40.0 57.5 72.8 91.3 98.0 160.0
Depreciation 22.5 25.5 30 34.5 40.5 46.5 52.5
Total 40.6 65.5 87.5 107.3 131.8 144.5 212.5

Uses:
Capital Expenditures -43.8 -50.4 -57.5 -66.2 -68.5 -78.8 -90.6
Change in working capital -19.5 -22.4 -25.8 -29.6 -34 -38.5 -44.3
Total -63.3 -72.8 -83.3 -95.8 -102.5 -117.3 -134.9

Excess Cash/ Borrowing Needs -22.7 -7.3 4.2 11.5 29.3 27.2 77.6
Dividend 0.0 0.0 4.2 11.5 29.3 27.2 77.6
Total excess cash/borrowing -22.7 -7.3 0.0 0.0 0.0 0.0 0.0

Dividend per share 0.0 0.0 0.2 0.6 1.6 1.5 4.2
Cash flow projection of company
Projected excess cash
200

150

100

50

0
2005 2006 2007 2008 2009 2010 2011

-50

-100
0% Div 30% Div 40% Div
HOW THE VARIOUS PROVIDERS OF CAPITAL OF GAINESBORO, SUCH AS ITS
STOCKHOLDERS AND CREDITORS MAY REACT AT DIFFERENT LEVEL OF DIVIDEND
PAYOUT?
Affect of dividend policy on price

R2=0.035
SENSITIVITY
Sensitivity
Analysis
Intrinsic
gLValue gS =
25.81 25.81 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5%
6.0% 30.89 6.0% 29.00 29.62 30.25 30.89 31.54 32.21 32.88
6.5% 34.06 6.5% 31.97 32.65 33.35 34.06 34.79 35.52 36.27
7.0% 38.10 7.0% 35.74 36.51 37.30 38.10 38.92 39.75 40.59
7.5% 43.41 7.5% 40.70 41.59 42.49 43.41 44.35 45.30 46.27
8.0% 50.71 8.0% 47.52 48.56 49.63 50.71 51.81 52.93 54.08
8.5% 61.37 8.5% 57.48 58.76 60.05 61.37 62.72 64.09 65.48
9.0% 78.42 9.0% 73.41 75.05 76.72 78.42 80.15 81.92 83.71
9.5% 110.04 9.5% 102.95 105.27 107.64 110.04 112.49 114.99 117.53
10.0% 188.86 10.0% 176.58 180.60 184.69 188.86 193.10 197.41 201.81
10.5% 731.27 10.5% 683.32 699.02 715.00 731.27 747.84 764.71 781.88
REACTION

Institutional growth oriented


Institutional value oriented
Individual investors long term retirement
Short-term trading oriented
WOULD A STOCK BUYBACK INSTEAD OF DIVIDEND AFFECT
INVESTORS’ PERCEPTIONS?
REPURCHASE PERCEPTION

Management thinks its shares are undervalued


Earning per share increases with number of
shares
Higher market price of the remaining shares
INVESTORS’ PERCEPTIONS
WOULD A CHANGE OF NAME HELP TO POSITIVELY FRAME
INVESTOR’S VIEW OF THE FIRM?
ADVERTISEMENT CAMPAIGN
Enhance the firm’s visibility and image
Company name is as integral part, just like its products
or technical service
In most cases, name changes signal improved profit
performance and increase stock price
A change in company brand name says to the market,
“We have changed our company (i.e., brand strategy,
management, organization, product offerings) and those
changes are for the better”
Change in brand attitude helps predict future business
performance
JUDGMENT

Probability 2005 2009


High 30% (4,088) 172
Average 40% (2,725) 115
Low 30% (1,363) 57
Value addition (17,151) 268

Sales growth 17%


Cost - $10 million
Profitable to invest in 2009
RECOMMANDATION

30% dividend policy should be adopted


Repurchase stock by residual earnings year
after 2005
Advertisement campaign can be adopted in
2009
JUSTIFICATION
30% dividend policy should be adopted
Projected excess cash

200

150

100

50

0
2005 2006 2007 2008 2009 2010 2011

-50

-100
0% Div 30% Div 40% Div
Repurchase stock by residual earnings year
after 2005
30.00
26.07 26.50
25.00

20.09
20.00

15.00
12.45

10.00

5.00

0.00
FCF DDM PAT P/E

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