Gainesboro Machine Tools

Corporation
Syndicate 6
Mitranti Anindya Ayu - 29121020
Joseph Gunawan - 29121036
Aditya Erawan - 29121249
Simon Erick - 29121289
1. In theory, to fund an increased dividend payout or a stock buyback, 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?

From those three elements, we think that Gainesboro’s management will be willing to vary on the investing
less or borrowing more. These two may vary since they are more volatile in means company can adjust
their borrow or invest behavior based on company analysis of the company needs and capability.

The last element which is issuing more stock will be remaining fixed as a matter of the company’s policy.
Issuing more stock is a fixed element since it’s become a better options for a company to get more equity,
even though it could cause decreased in stock’s price. This element is one of the primary element in
establish a company payout policy.
 2. What happens to Gainesboro’s financing need and unused debt capacity if:

A. No Dividend

● Retained earnings are used for

financing and development.
● In the situation where the
company deficit to cover the
cost of projects and operation,
company can take the
advantage of the debt capacity.
 2. What happens to Gainesboro’s financing need and unused debt capacity if:

B. 20% Payout
20% payout the dividend to investors

In this case we need to use the debt

capacity to cover the situation when
the dividend payout, the cost of
projects and operations greater than
the total net income and depreciation
The financing needed in order to cover
the deficit and also for future
development.
 2. What happens to Gainesboro’s financing need and unused debt capacity if:

C. 40% Payout In 40% payout ratio, financing need’s

of the firm will need more cashflow
and they are probably going to use the
unused debt, since the calculation
shown that in 2011 they will really
have the excess cash after dividend.

In 40% payout, debt is needed more

since the excess loss/chas outflow
also bigger, but in the other hand, it
will give a better perspective from the
shareholders as the firm share more
dividends.

To compensate the debt increases,

shareholders received higher returns
since they face higher financial risk.
 2. What happens to Gainesboro’s financing need and unused debt capacity if:

D. Residual Payout Policy

All the excess cash will be use for

dividend payout. The further financing
need, such as r&d activity or business
expansion, Gainesboro will utilize the
debt capacity.
3. 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? What should Ashley Swenson recommend to the board of directors
with regard to a long-term dividend payout policy for Gainesboro Machine Tools Corporation?

● Providers of capital, such as stockholders & creditors, may react positively to the dividend payout in 2005, as
Gainesboro not pay the dividend on the first quarter of 2005. The declaration of dividend might be a good signal for
the providers, as this showed that the company growing better in 2005. For the creditors, they also will take notice
whether the company still able to meet their obligations while they decided to dividend payout.

● Zero Payout
The argument in favor of applying the zero-payment policy is that this policy will lead the money stream utilization to
increasing in technology and CAD/CAM is expected. By applying this solution, the expectation is a high appreciation
of capital coming because the company will known as a company with quite high technology.

And the argument against the implementation of zero payout is as if Gainesboro provides a sizeable dividend in the
future, but the challenges of this strategy can make investors panic because this condition makes capital providers
skeptical that the company is in good condition, able to continue to grow and be profitable in the future.
3. 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? What should Ashley Swenson recommend to the board of directors
with regard to a long-term dividend payout policy for Gainesboro Machine Tools Corporation?

● 40% Payout
The argument for 40% payout dividend means that the company will pay $0.8 for each outstanding share. This will give
good signal to investors, bring some trusts as the company can pay more dividends to the shareholders. The
investment of the company should be back to the original business model which 36% for the electrical equipment and
26% for machine tools.

40% payout dividend might be contrast for the management of the firms as this dividend is too much when seeing the
cash flow of the company on the last years. This will lead to the reduction of company’s capital especially when the
company was planning to develop new business lines as stated on the case.

● Residual payout policies

The argument for applying this policy is that the company only distribute the dividends if the company still has excess
funds after pay all the obligations. It means that if the company still has the excess, it can be distributed as dividends.
By applying the payout policies, company only distribute based on company performance and financial capability.

The argument against this policy is that the residual payout policy show the company performance transparently with
the direct impact to the investors through uncertain dividends distribution and possibly impact to the company's stock
price. This condition put investors in uncertain position and risky.
3. 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? What should Ashley Swenson recommend to the board of directors
with regard to a long-term dividend payout policy for Gainesboro Machine Tools Corporation?

Recommendations: 20% Dividend Payout.

With the 20% dividend payout, the company maintain their commitment to pay dividends. Beside that, it is a
good strategy to keep their investors trust them. Both investors, the one who want to receive dividends and the
one who want to see the company growth will be satisfied. The last reason is to balancing the financial needs
and disbursement of their free cash flows.
4. How might various providers of capital, such as stockholders and creditors, react if Gainesboro
repurchased its shares? Should Gainesboro do so?

For the providers of capital, repurchasing the shares also give another good signal. As repurchasing the shares
could be a strategy that the company did for making the providers’ perspective of the company getting better.
Repurchasing the shares also will increase the market price, so this is also a good thing for the providers of
capital. For the shareholders, trading oriented shareholders (26%) will take advantage from higher stock price
and there would be a tax reduction from capital gain. For creditors, this repurchasing action might increase the
debt and the debt to equity ratio will be higher but earning per share lower. On the other hand, this
repurchasing might be the strategy of the company as the company is going to rebrand the firm.

No, Gainesboro not supposed to repurchase their stock at current condition, there’s no major benefit to do it
for now. Because currently Gainesboro just recovered from loss in EPS and still negative in cash flow
projection for the upcoming years. To repurchased the stocks, company need great amount of cash which
currently they don’t have even though the company is growing. If they insist to do it, they have to take a great
amount of debt and it will risk the company if the company doesn’t perform well in the future. The unpaid debt
will risk the company and possibly lead to lost the debt capacity or even bankruptcy.
5. Should Swenson recommend the corporate-image advertising campaign and corporate name
change to the Gainesboro’s directors? Do the advertising and name change have any bearing on
the dividend policy or the stock repurchase policy that you propose?

Yes, Swenson should recommend corporate-image advertising campaign and corporate name change to the
Gainesboro’s directors, the reasons are following:
1. Rebranding doesn’t directly impact the company stock price, but it possible to give company more
exposure that would boost company profile and lead to new clients which might impact in increase the
company stock price
2. Rebranding will give a fresher look to the company as lots of things change and more representative to
the product that Gainesboro sell/produce
3. Rebranding with the name Advanced Systems International may open the opportunity to the
international investors and markets.
5. Should Swenson recommend the corporate-image advertising campaign and corporate name
change to the Gainesboro’s directors? Do the advertising and name change have any bearing on
the dividend policy or the stock repurchase policy that you propose?

Advertising and name change would give no change on the dividend policy as there’s no change on the total
ordinary shares. This might give more profit to company as they change its name, but only the amount will
change since we expect the rebranding could lead to new markets and investors, but the policy still the
same.

Stock repurchase policy might be slightly different because this policy could be one of the strategy of the
company before and after rebranding. Stock repurchase could be made before the rebranding as this thing
will cause a “premium” effect of the company, so all the shareholders and future investors convinced that
this company will be more profitable, lead the to be more attracted to buy the company stocks..