PROBLEM STATEMENT

 Ashley Swenson, chief financial officer (CFO) of Gainesboro

Machine Tools Corporation needed to submit a
recommendation to Gainesboro’s board of directors
regarding the company’s dividend policy, which had been
the subject of an ongoing debate among the firm’s 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.
 Gainesboro’s stock, which had fallen 18%, to $22.15.
 Now, Ashley Swenson’s dividend-decision problem was
compounded by the dilemma of whether to use company
funds to pay shareholder dividends or to buy back stock.
 Background on the Dividend Question
 Out of this combination of a troubled past and a
bright future arose Swenson’s dilemma.
 Did the market view Gainesboro as a company on the
wane, a blue-chip stock, or a potential growth stock?
 How, if at all, could Gainesboro affect that
perception? Would a change of name help to
positively frame investor’ views of the firm?
 Did the company’s investors expect capital growth or
steady dividends?
 Would a stock buyback instead of a dividend affect
investors’ perceptions of Gainesboro in any way?
 And, if those questions could be answered, what
were the implications for Gainesboro’s future
dividend policy?
 COMPANY PROFILE
 Gainesboro Corporation was founded in 1923 in Concord,
New Hampshire, by two mechanical engineers, James
Gaines and David Scarboro.
 In the 1940s, the company’s large manufacturing plant
produced armored-vehicle and tank parts and
miscellaneous equipment.
 By 1975, the company had developed a reputation as an
innovative producer of industrial machinery and machine
tools.
 In the early 1980s, Gainesboro entered the new field of
computer-aided design and computer-aided manufacturing
(CAD/CAM).
 The company had had an aversion to debt since its
inception.
 COMPANY PROFILE
• By the end of 2004, CAD/CAM equipment and
software were responsible for about 45% of sales;
presses, dies, and molds made up 40% of sales; and
miscellaneous machine tools were 15% of sales.
• In the late 1990s and early 2000s, technological
advances and aggressive venture capitalism fueled
the entry of highly specialized, state-of-the-art
CAD/CAM firms.
• As a result, revenues slipped from a high of $911
million, in 1998, to $757 million, in 2004.
 COMPANY PROFILE
 To combat the decline in revenues and to improve
weak profit margins, Gainesboro took a two-pronged
approach.
 First, it devoted a greater share of its research and
development budget to CAD/CAM in an effort to re-
establish its leadership in the field.
 Second, The company underwent two massive
restructurings.
 Then, in 2004, the company began a second round of
restructuring by altering its manufacturing strategy,
refocusing its sales and marketing approach, and
adopting administrative procedures that allowed for a
further reduction in staff and facilities.
 COMPANY PROFILE

Gainesboro had developed applications of the

product for the chemicals industry and for the
oil- and gas-refining industries in 2004
and, by the next year, it had created
applications for the trucking, automobile-
parts, and airline industries.
 CORPORATE GOALS:

A number of corporate objectives had grown

out of the restructurings and recent
technological advances.
First, and foremost, management wanted and
expected the firm to grow at an average
annual compound rate of 15 percent.
In order to achieve that growth goal,
Gainesboro management proposed a strategy
relying on three key points.
 CORPORATE GOALS:
• First, the mix of production would shift substantially.
CAD/CAM and peripheral products on the cutting
edge of industrial technology would account for
three-quarters of sales.
• Second, the company would expand aggressively in
the international arena. Their expansion would be
achieved through opening new field sales offices
around the world.
• Third, the company would expand through joint
ventures and acquisitions of small software
companies
 Dividend Policy
Zero-Dividend Pay-out:
 A zero-dividend pay-out will be financially favourable
strategies for the company as no external funds need
to be borrowed to pay-out dividends.
 Moreover, existing cash can be invested to fund new
projects.
Below 40% Dividend Pay-out i.e. 20% Dividend Pay-out:
 This strategies will imply debt burden to the company
but not as high as the 40% dividend pay-out.
 However this strategies would have better financial
flexibility and reduce yearly liability of the company to
the investors.
 Dividend Policy
40% Dividend Pay-out:
 This strategies will strain the cash of the company and
also increases the debt on the balance sheet.
 It will reduce flexibility of the company.

Residual-Dividend Pay-out:
 The company’s success of making a dividend pay-out
depends on the ability to capitalise on the new
technology being implemented which in turn will able
to implement production in fully automated thus
reducing the human capital and production cost.
 Dividend Policy
Corporate Rebranding:
 Corporate rebranding by changing their name from
Gainesboro Machine Tools Corporation to “Gainesboro
Advanced Systems International, Inc” will reflect that
the company is embarking or strategizing the business in
technology locally and internationally which will attract
more investor.
 With this objective, they can enhance the firm’s visibility
and image as such stock prices will respond positively to
the campaign and name changes.
 Dividend Policy
Share Buyback:
 In this strategy, the company will determine whether or
not to buy back share. Basically, shareholders would
prefer a buyback because in this way they would rather
see their share prices increase in value (if they didn’t
sell) or they can enjoy the return coming from the
positive difference in buying their shares cheap and
selling high.
 The decision on whether to buy back stock or not
should be that, if the intrinsic value of Gainesboro is
greater than its current share price, then the shares
should be repurchased.