Gainesboro Machine Tools Corporation Executive Summary
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