Gainesboro Machine Tool Corporation

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INDIAN INSTITUTE OF MANAGEMENT, INDORE Finance 2 Case Analysis Gainesboro Machine Tool Corporation Course Instructor: Prof A Kanagraj Submitted By: Amol Vyawahare Roll Number: 2008PGP021B Gainesboro Machine Tool Corporation Background Reading: Once a company makes a profit, they must decide on what to do with those profits. They could continue to retain the profits within the company, or they could pay out the profits to the owners of the firm in the form of dividends. Once the company decides on whether to pay dividends, they may establish a somewhat permanent dividend policy, which may in turn impact on investors and perceptions of the company in the financial markets. What they decide depends on the situation of the…show more content…
Case Background Gainesboro Corporation was founded in 1923 by two mechanical engineers, James Gaines and David Scarboro. It was the industry leader in press and mould manufacturing. Its revenues declined from $911 million in 1998 to $757 million in 2004. To combat the decline in revenues and weakening profit margin it followed a two prong approach. First it devoted a greater share of its research and development budget to CAD/CAM to establish its industry leadership. Second the company underwent two major restructuring. The company had set the objective of achieving 15% CAGR growth. In order to achieve it, following three points were proposed: 1) Mix of production to shift substantially. 2) The company would expand aggressively in the international arena. 3) The company would expand by joint ventures and acquisitions of small software companies. Traditionally, it was a conservative company and preferred to keep its debt-equity ratio below 40%. The two restructuring program implemented resulted in net loss. However the company continued to pay dividends which exceeded earnings. In 2004, it declared dividends in spite of heavy losses. The board did not declare any dividends for the two quarters of 2005, but committed itself to resuming dividend payment as soon as possible. Problems Ashley Swenson, Chief Financial Officer of Gainesboro Machine Tools Corporation had to submit a recommendation to the board of directors regarding the company’s dividend

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