Essay on Gainesboro Machine Tools
In mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM equipment manufacturer must decide whether to pay out dividends to the firm¡¦s shareholders or repurchase stock. If Swenson chooses to pay out dividends, she must also decide on the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising and change its corporate name to reflect its new outlook. The case serves a review of the many practical aspects of the dividend and share buyback decisions, including(1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share repurchase decisions.
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Zero ¡V dividend payout:
As mentioned in the case and by Gainesboro¡¦s management, having a zero-dividend policy would not significantly hurt the company with regards to its investor relations. In fact, due to recent technological advancements and new product issues, the company could be justified in withholding dividends from shareholders by reinvesting earnings to achieve greater growth and solidify market share. Advantages of following this alternative are as mentioned a positive cash flow, no need to borrow to pay dividends, long-term strategy that focuses on intrinsic value, and the ability to create a platform upon which Gainesboro can operate from in strength.
The disadvantages of following this approach is that it deviates away from the company¡¦s traditional past and can be viewed by investors as signs of financial trouble or inability to generate substantial returns. This can be dangerous as Gainesboro relies upon equity for the majority of financing (78%), and a mass exodus by investors could seriously hinder any growth or future prospects the company does have.
40 percent dividend payout:
A 40% dividend is almost the exact reversal of the latter alternative, where the advantages of continuing to payout high