Gainesboro

Gainesboro Machine Tools Corporation

Executive Summary

To: Board of Directors

From: Ashley Swenson

The problem of Gainesboro is to make a decision whether the company should choose for dividend payout or zero dividend payout policy.

We believe that Gainesboro is a growing firm which can easily achieve its goal of increasing its net income in future. Therefore Gainesboro should undertake more projects or repurchase company’s shares, by using the excess cash with zero dividend payout. Since Gainesboro is planning to invest in Artificial Workforce, they can use the funds to pursue this at this stage. Even though investors will be more confident of its future earnings with dividend payout of between 30% and 50% at the growth range of 10% to 20% consistently, the company may need to take on borrowings to pay dividend to shareholders. Moreover, dividend payout will cause the company to pay more income tax, as dividend is a taxable income. Gainesboro should focus on its intrinsic value and the ability to create a platform upon which the company can provide a good performance in operations in its long term strategy.

The goal of the firm is to maximize the market value of the firm. It is recommended that zero dividend payout policy should be chosen, in which the funds can be reinvested in other projects or investments and repurchase shares that will increase the value of the firm as a whole and consequently increase the market value of the stock.

Furthermore, the corporate-image advertising campaign and corporate name change would cost approximately $10million. Although the visibility and image are essential to the company, however, investors and shareholders are concerning more about mediocre outlook on Gainesboro’s returns and its growth prospects. Hence, it is not recommended that the corporate-image advertising campaign and corporate name change.