Business Essay

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Case Study – Gainesboro Machine Tools Corporation 1. Describe the payout history of Gainesboro. The company Gainesboro had paid a strong, stable and high dividend to its stockholders before 1999 after which the company’s earning start experiencing declines. For three years since 2000, dividend had exceeded earning, and decreased below earning in 2003.Despite the biggest losses in 2004, the company paid a small dividend to its shareholders. In the two quarters of 2005, the Board declared no dividend but committed itself to resuming payment of dividend as soon as possible. 2. Describe the expected changes in Gainesboro. The company is expected to grow and be profitable in the near future. The management believes that the investment made by the company to expand will increase its market share and be more productive than competitors. They also believe that the newly developed products will render the competitors products. In addition to that, the company’s future is seen as bright by management and shareholders. 3. In theory, to fund an increased dividend payout or a stock repurchase, a firm might invest less, borrow more, or issue more stock. Which of those three elements is Gainesboro’s management willing to vary, and which elements remain fixed as a matter of the company’s policy? 4. What happens to Gainesboro’s financing need and unused debt capacity if: a. no dividend is paid? b. a 40% payout is pursued? c. a residual payout policy is pursued? 5. How might Gainesboro’s various providers of capital, such as its stockholders and creditors react if Gainesboro declares a dividend in 2005? What are the arguments for and against the zero payout, 40% payout, and residual payout policies? If the company paid a dividend in 2005, which will have a signaling effect saying that the company is back

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