Gainesboro Case Study

Finance Capstone

EFB340

Case 3: Distributions to Shareholders: Dividends and Repurchases

Vasilios Papalexiou - n7531753

Emily Gaedtke – n7527225

Phoebe Davidson – n7517696

Yanmeng Li – n7611374

GROUP S2

Table of Contents

1.0 Introduction​2

2.0 Distribution of wealth to shareholders​3

2.1 Dividend or Repurchase​3

3.0 How much should Gainesboro Payout?​5

Table 1 – D/E Ratio​5

Table 2 – Unused Debt Capacity​5

3.1 No Dividends are paid​6

3.2 A 20% payout is pursued​6

3.3 A 40% payout is pursued​6

3.4 The residual payout​7

3.5 Reaction from shareholders if Gainesboro decided to repurchase shares​7

4.0 Marketing the Gainesboro’s new direction​8

5.0 Conclusions​9

6.0 Appendices​10

6.1 Appendix 1 – Dividend Per Share​10

6.2 Appendix 2 – Sensitivity Analysis​11

7.0 References​12

1.0 Introduction

This report will decide whether Gainesboro should reimburse shareholders. Then it will determine the adequate reimbursement amount, followed by the decision of reimbursement by dividends or repurchase shares.

2.0 Distribution of wealth to shareholders

2.1 Dividend

Gainesboro has the choice of redistributing wealth to the shareholders by either a dividend or share repurchase. Both have advantages and disadvantages for Gainesboro, and selecting the appropriate option is a sensitive issue. This has been addressed by several theories.

Firstly, Dividend Irrelevance Theory suggests that dividends do not impact the firms’ stock. M&M argued that the only way a firm may enhance their value is by investing in productive assets. Dividends don’t affect a company’s stock price as investors can create their own dividends by selling a portion of their shares.

Secondly, Bird-In-The-Hand Theory implies that high dividends are more valuable to investors as they are less risky than capital gains. Also some investors prefer the regular...