Gainesboro Machine Tools Corporation Executive Summary Essay

1393 Words Apr 11th, 2016 6 Pages
Statement of the Problem Established in 1923, Gainesboro Machine Tools Corporation (Gainesboro) started out manufacturing machinery parts but by the 1980s started to pioneer in the industry of computer aided design (CAD) and computer aided manufacturing (CAM). Competition ramped up in the 1990s and Gainesboro’s revenues per share declined by 16% from 1998-2004 (Exhibit 5). The company restructured itself and focused more resources on innovation. By late 2004 the company started to turn around its attrition with a positive growth outlook. In August 2005, Ashley Swenson, the Chief Financial Officer of Gainesboro, was considering 3 dividend policies to implement; a zero-dividend payout, a 40% dividend payout or $0.20 a share, or a residual …show more content…
This might lead to higher stock valuations raising the Gainesboro’s value to investors.

Analysis of Alternatives
I. Zero dividend payout This allows the company to be consistent with its new strategy of high growth and innovation. According to the case, all but one of the major CAD/CAM companies have a zero-dividend payout policy. Also, the majority of equipment manufacturers and machine tool manufacturers are paying dividends while some are not. This shows that high tech growth firms are not paying dividends and a zero-dividend policy is not unheard of for manufacturing companies (Exhibit 6). Gainesboro’s CAD/CAM business comprised of almost half of its sales. This means that Gainesboro is transitioning from a manufacturing to a high technology company which would require more capital for growth. Using all of its earnings to fuel its growth allows it to expand its business without resorting to debt. The average debt/equity ratio for CAD/CAM companies was 11.3 which is significantly lower than Gainesboro’s current ratio of 28% (Exhibit 6). Gainesboro has had a historical aversion to debt and a zero dividend policy would help keep it that way. A downside to this option is that it could send a negative signal to investors. Gainesboro assured investors that they will be paying out a dividend in 2005. Falling back on this policy discourage investor confidence and cause them

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