Gainesboro Machine Tool Corporation

GAINESBORO MACHINE TOOLS CORPORATION

CASE STUDY

Major Problem:

The company has been experiencing decreasing sales since 2002 due to international competition, technological innovations and the rise of the US dollar. Due to this net income is also declining. The company undertook two major restructurings in 2002 and 2004. The large restructuring costs resulted in negative earnings in both these years. The operational restructuring done in 2004 resulted in the production of an advanced system that could help stimulate demand for the company’s products and help increase sales by 15% each year. For three years since 2000 dividends have exceeded earnings, in 2003 dividends were decreased to a level below earnings. In 2004 despite losses dividends were declared. No dividend has been paid yet in 2005 although commitment to pay has been made. The major problem facing the company right now i whether to pay dividends out of the positive net income in 2005 or repurchase stock. If dividend option is adopted the company has to decide among three policies:

-zero dividend payout

-40% dividend payout

-residual dividend payout

Analysis:

Zero dividend policy:

Pros:

- its a growing company and needs to reinvest retained earnings

- borrowing for dividend can be avoided

- can be positioned as high growth and high technology firms, no firms in this industry pay dividends

-more and more companies are not paying dividends

- positive cash flow by 2007

Cons:

- have already made commitment to pay dividend

- sudden fall in DPS to zero may send negative signal to investors

- majority of investors are value oriented and long term retirement people

|Projections |2005 |2006 |2007 |2008 |2009 |2010 |2011 |

|Sales |870.1 |1000.6 |1150.7 |1323.3 |1521.8...