TN25 Gainesboro Machine Tools Corporati

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Gainesboro Machine Tools Corporation

Teaching Note

Synopsis and Objectives

In mid September 2005, Ashley Swenson, the chief financial officer (CFO) of a large computer-aided design and computer-aided manufacturing (CAD/CAM) equipment manufacturer needed to decide whether to pay out dividends to the firm’s shareholders, or to repurchase stock. If Swenson chose to pay out dividends, she would have to also decide upon the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising, and change its corporate name to reflect its new outlook. The case serves as an omnibus review of the many practical aspects of the dividend and share buyback decisions, including (1)
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(Or alternatively, Why pay any dividends?) How will Gainesboro’s various providers of capital, such as its stockholders and bankers, react to a declaration of no dividend? What about the announcement of a 40% payout? How would they react to a residual payout?
The instructor needs to elicit from the students the notions that the dividend-payout announcement may affect stock price and that at least some stockholders prefer dividends. Students should also mention the signaling and clientele considerations.
4. What risks does the firm face?
Discussion following this question should address the nature of the industry, the strategy of the firm, and the firm’s performance. This discussion will lay the groundwork for the review of strategic considerations that bears on the dividend decision.
5. What is the nature of the share repurchase decision that Swenson must make? How would this affect the dividend decision?
The discussion here must present the repercussions of a share repurchase decision on the share price, as well as on the dividend question. Signaling and clientele considerations must also be considered.
6. Does the stock market appear to reward high-dividend payout? What about low-dividend payout? Does it matter what type of investor owns the shares? What is the impact on share price of dividend policy?
The data can be interpreted to support either view. The point is to show that simple extrapolations from stock market data are untrustworthy,

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