Case 3: Rockboro Machine Tools Corporation

Executive Summary

Rockboro Machine Tools Corporation started as a machine tool manufacturer & industrial equipment
manufacturer which then entered the field of computer-aided design and computer-aided manufacturing
(CAD/CAM). It successfully developed a superior line of CAD software and equipment in 1980s. But in the
time of great recession, the company fell behind its competition in developing user-friendly software and
integrating designs. Their net margin dropped and in order to improve their financials, the management
sold 3 unprofitable business lines and 2 plants, eliminated 5 leased facilities in 2012. They also refocused
the marketing and ads and even restructured their personnel in 2014 which resulted to the largest per-
share earnings loss. Dividends were maintained at $0.64 per year until the board voted to pay only the
half for 2014.

In that same year, Rockboro introduced a new system known as the Artificial Intelligence Workforce (AIW)
which first shipped with high orders totaling to $115M with backlog orders of $150M by the year-end. It
was viewed to help restore the margins not seen in years that the management established their
corporate goals with high expectations in their revenues, yielding at an average annual compound rate of
15% through 2021. The board, whom declared no dividend payout at the start of 2015, even committed
to resume payment ideally at the end of the year. Conversely, the management stayed concerned about
the apparent developments from competitors and an unfavorable prediction in US & major economies in
the coming years.

For the past 4 years, investments in Rockbro returned no capital gains to its shareholders. With a current
stock price of $15.25 which has been the same as it had been on September 15, 2011. The CFO of the firm,
Sara Larson, needs to submit a recommendation regarding the company’s dividend policy. Larson even
recalls that the company repurchased their stocks back in 2009, but no apparent impact had been gained.

Using the Sources-and-Uses model of Rockboro, the group projected the possible earnings until 2021 to
align with the company’s corporate goals. The company had an impression that 40% Debt-to-Equity ratio
would work best for them. The projection suggested a 32% payout rate to comply with the 40% D/E ratio
until 2021, assuming the consistent sales growth of 15%. The current stock price was tested and thought
to be undervalued, but buying back stocks would only reduce the available resources intended for any
dividend payout so it is not suggested to be pushed through.