Gainesboro Machine Tools Corporation

Gainesboro Machine Tools Corporation

- Monica Sawant

Analysis

In Gainesboro Management, the management had not cut on the dividend in spite of the organization suffering losses in years 2002 and 2004. The company has increased its borrowings in order to be able to pay the dividends which can be seen from exhibit 2 : bank loans. Still in year 2004, Gainesboro failed to pay the dividend in the last 2 quarters.

The firm had been investing less in the operations, which can be seen in exhibit2 decreasing retained earnings.

In August 2005, Swenson had to choose from the three different dividend policies and recommend the best one to the management.

The three different dividend policies were:

* Zero- dividend payout

* 40% dividend payout or dividend of .20 a share

* Residual dividend payout

Gainesboro's financing need and unused debt capacity under below situations:

No dividends are paid:

Firms do not pay dividends under the principle that their reinvestment strategies will, through stock price appreciation lead to greater returns for the investor.

Dividend policy (or distribution policy) distributes some amount of cash (possibly zero) to its investors and this policy can affect stock prices.

So Gainesboro could choose the zero dividend pay but need to be careful about the shareholders who have maintained their relationship with the organization because of large dividends.

A 20% payout is pursued

Company would have positive excess cash from 2009 as a large amount would be utilized for the growth of the company.

A 40% payout is pursued

Investors and shareholders would be more positive about the future growth and the stock price would rise .But a very small part would form a part of retained earnings.

According to exhibit 8, the company would be generating 'after dividend excess positive cash' from 2011.

A residual payout policy is pursued

Residual dividend policy is used by companies, which finance new projects through equity that is internally generated. In this policy, the dividend payments are made from the equity that remains after all the project capital needs are met. This equity is also known as residual equity.

This policy would help limit borrowing and use the retain earnings for growth. However, some shareholders might