Gainesboro's Various Providers of Capital

How will Gainesboro’s various providers of capital, such as its stockholders and bankers, react to a declaration of no dividend? What about the announcement of a 40% payout? How would they react to a residual payout?

Answer

1) Institutional growth oriented: These types of investors are interested in companies which have a high growth potential. They want the company to keep profits as retained earnings so that it can use these funds to fuel its future growth. Hence they will react negatively to dividend payments.

2) Institutional value oriented: In this strategy, investors select stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated. Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields. Thus they will favor that the company pay high dividends.

3) Individual investors long term retirement: These types of investors prefer stocks which retain cash to support future growth. Thus they will prefer that the company doesn’t pay dividends.

4) Short-term trading oriented: These types of investors will benefit from the declaration of dividends. Thus they will react favorably to dividend declarations.

Arguments for and against for various policies:

* Zero-dividend policy: Gainesboro had recently laid emphasis on advanced technologies and CAD/CAM. This needed huge cash for future growth. Since the company belonged to high technology and high growth segment it was necessary that it preserves capital for its future expansion.

* 40 percent dividend payout: The average industry payout was 36% in electrical-industrial equipment and 26% in...