Gainesboro Machine Tools

Summary In mid September 2005, Ashley Swenson, Chief Financial Officer of a major CAD / CAM device manufacturer, had to decide whether to pay dividends or to redeem shares to shareholders. If Swenson chooses to pay a dividend, she must also decide the amount to pay. A secondary issue is whether companies need to implement corporate image advertising campaigns and change the company name to reflect new prospects. In this lawsuit, we consider many practical aspects concerning dividend and share buy-back decisions, including (1) signal influence, (2) customer impact, (3) increase in dividend payment financial and investment impacts It has been.

In mid September 2005, Chief Financial Officer (CFO) Ashley Swenson needed to submit a proposal on the Company's dividend policy to Gainsboro's Board of Directors. Gainsborough's stock price fell 18% to $ 22.15 due to delayed impact by Hurricane Katrina. Currently, Ashley Swenson 's dividend decision problem is a problem for him to pay shareholder' s dividend using corporate funds or to buy back shares. Under this policy, the company demands not to pay dividends between 2005 and 2011. In 2005, the company spent about $ 63.3 million, but since the total amount of funds was only 40 million dollars, the company borrowed $ 22.7 million to balance the financial situation of the company. The same happened in 2006, when the company borrowed 7.3 million dollars (total expenditure of 72.8 million dollars - total resources of 65.5 million dollars)

Case Chart 8 shows the estimate of the necessary borrowing amount. Let's assume that the maximum debt limit is a policy issue and is 40% of the carrying value of the capital. How will Gainsborough's various capital providers (shareholders, creditors, etc.) respond if Gainsborough announces dividends in 2005? What is the opposite of zero payment, 40% payment, support for residual payment policy? What should Ashley Swenson recommend to the Board on the long-term dividend payment policy of the Gainsborough Machine Tool?