Gainesboro Machine Tools Corporation

Gainesboro Machine Tools Corporation

Ali Hussain – 104323867

Problem:

        Gainesboro was an innovative company which was growing substantially from 1989 – 2000, when afterwards they began to ‘spiral downward’. The stock had fallen 18% to $22.15 weeks after the impact of hurricane Katrina. CFO Ashley  Swenson must now submit a recommendation to the board of directors regarding the company’s dividend policy. The decision must be made on whether to finance the company through equity, or debt. The options are whether to issue a 40% dividend, have no dividend at all, a residual dividend payout, repurchase shares, or undergo a corporate image change.

Options:

1. Issue a 40% dividend or $0.20 Dividend per share

1. Pros:        

1. Covers promised dividend written in the special letter
2. Shows company confidence
3. Stock price may rise
4. Will retain and attract more investors

1. Cons:

1. Could take away from potential investments in growth of company
2. May raise significant debt that will be hard to pay off
3. Stock price may fall

1. Zero – dividend payout

1. Pros:

1. Long-term investors may find this attractive
2. Could represent major changes to the company, expansions being made, investments in new departments, acquisitions, etc.
3. There won’t be the need of financing a dividend without one in place
4. Will have desirable amounts of cash in 2007

1. Cons:

1. Not ideal to short-term investors
2. Not following through with the special letter that was issued regarding the return of a dividend, may reduce morale of investors
3. Stockholder data says that majority is short-term inclined investors, not as many care for the growth and the long-term being of the company

1. Residual Dividend Payout

1. Pros

1. No obligation to issue dividends, dividends will be paid out based on excess retained earnings
2. Allows company to refrain from going into debt
3. Company will be able to use cash and invest into new ventures, expansions, acquisitions, etc. that may help the future growth of the firm opposed to just supporting the short-term goals of investors

1. Cons

1. Inconsistent dividend, may not always issue a dividend
2. Investors may be discouraged by the fact that they are not always receiving a dividend as promised in the special letter

1. Share Repurchase

1. Pros

1. Will instill confidence
2. Increase of EPS
3. Minimize dilution

1. Cons

1. Debt must be taken on in order to conduct a share repurchase, could be spent on the expansion of the company instead

1. Changing Brand Name

1. Pros

1. Good way of marketing for the company, could attract new investors

1. Cons

1. High cost, and may be worthless, could potentially show no change

Decision:

        After reviewing the case and all the potential decisions that could be made, along with reviewing the exhibits, it seems that, in my opinion, a residual dividend payout plan may be the best route for the company. This will allow the company to continue to payout dividends as long as they are showing positive growth and positive earnings. They will be able to continue to grow the company which will benefit long-term investors and potentially even short-term investors if they are able to constantly show profits. It is imperative for this company to be able to have the option of paying out a dividend especially given the fact that they are such a highly innovative company and need to constantly be searching for new technologies and processes to be investing in in order to stay on-top of the ball. A fluctuating dividend may not be the most desirable choice but in the current situation may be the best option for the company at this time.