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…

Also investors who are looking for a stable dividend paying stock will most likely sell their shares.
II. 40% dividend payout or a dividend of $0.20 a share
A benefit to this option is that it is within the expectation of investors. At $0.80 a share, this would be the highest dividend payout since 2001 which would be a strong signal to investors that the company has turned around its troubles and is back on track to success (Exhibit 5).
A drawback to this policy is that the company would need to borrow money to pay the dividend and would add an additional cost to their cash flows. Its debt-to-equity would increase significantly and this goes against the company’s character of avoiding debt. According to the data, the company would not be profitable until 2011 and this is estimated with an optimistic 15% growth every year (Exhibit 8). If the prediction is an overestimate, the company could be in serious financial trouble. Another detriment to this policy is that it is inconsistent with the direction of the company. Gainesboro transitioning to become a high tech growth company with its investments in their CAD/CAM technologies. Having negative cash flows inhibits it from investing in new projects.
III. Residual-dividend payout An advantage to this option is that it gives Gainesboro managers an incentive to make good investments which result in positive NPV in order to reward shareholders. This establishes a confidence and trust with