Case Study 26

621 WordsJun 12, 20133 Pages
Case #25 Gainesboro Machine Tools Corporation Objectives In September 2005, Chief Financial Officer (CFO) Ashley Swenson, of a computer –aided design and computer-aided manufacturing (CAD/CAM) equipment manufacturing company had to make the decision of paying out dividends to shareholders, or to repurchase stock. If Swenson went with the option of the payout she would need to decide on how large the payout would be. Another issue Swenson had to face was to decide rather the company should take on the campaign of corporate-image advertising, and convert its corporate name to mirror its new outlook. The case serves as a review of the many practical aspects of the dividend and share buyback decisions, to include signaling effects, clientele effects and the finance and investment implications of increasing dividend payouts and share repurchase decisions. This case can follow a treatment of the Miller-Modigliani dividend-irrelevance theorem and serves to highlight practical considerations to consider when setting a firm’s dividend policy. Company Background Gainesboro Corporation was founded in 1923 in New Hampshire. The founders of the company were two mechanical engineers, James Gaines and David Scarboro. The company by 1975 had made a name as an innovative producer of industrial machinery and machine tools. The company perfected CAM equipment by developing a line of presses that manufactured metal parts by responding to computer demands. The company also developed a superior line of CAD software and equipment that allowed engineers to design a part to exact specifications on a computer. The company innovated the market by providing a superior product. This was proved by the company’s sales, profit and growth throughout the 90’s and early 2000’s. The company fell behind its competition in the development of software and as a result the company’s revenues

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