Northboro Machine Tools Corporation

18 Pages Posted: 21 Oct 2008

See all articles by Robert F. Bruner

Robert F. Bruner

University of Virginia - Darden School of Business

Casey Opitz

University of Virginia - Darden School of Business

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In mid-1992, Christine Olsen, the chief financial officer (CFO) of this large CAD/CAM equipment manufacturer, must decide on the magnitude of the firm's dividend 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 decision, including (1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout.




Does it matter whether we pay a high or low dividend—or no dividend at all? To whom? And why? Our board is hearing some conflicting claims about dividend policy. I need to resolve this and recommend a dividend decision to the board for the third quarter of 1992.

With these words, Christine Olsen, the chief financial officer of Northboro Machine Tools Corporation, explained that she had become the judge in a debate over dividend policy within the company. After years of traditionally strong earnings and predictable dividend growth, the company faltered in the late 1980s. In response, management implemented two extensive restructuring programs, both of which were accompanied by net losses. For three years in a row, dividends exceeded earnings. Then, in 1990, dividends decreased to a level below earnings. Despite extraordinary losses in 1991, the board of directors declared a small dividend. For the first two quarters of 1992, the board declared no dividend. But in a special letter to shareholders the board committed itself to resuming the dividend as early as possible—ideally, in 1992. In the summer of 1992, Olsen had to recommend to the board a dividend policy for implementation in the quarter ending September 30.

As a related matter, senior management was considering embarking on a campaign of corporate image advertising, along with changing the name of the corporation to “Northboro Advanced Systems International, Inc.” Management felt that this would help improve the perception of the company in the investment community. Olsen needed to recommend action to the board on this proposal.

Overall, management's view was that Northboro was a resurgent company that demonstrated great potential for growth and profitability. The restructurings had revitalized the company's operating divisions, and a new product promised to make its predecessors' and competitors' products obsolete. Many within the company viewed 1992 as the dawning of a new era that, in spite of the company's recent performance, would turn Northboro into a growth stock. The company had no Moody's or Standard & Poor's rating because it had no bonds outstanding, but Value Line rated it an “A” company.

. . .

Keywords: Equity, debt policy, dividend policy, valuation, diverse protagonist, gender (female protagonist)

Suggested Citation

Bruner, Robert F. and Opitz, Casey, Northboro Machine Tools Corporation. Available at SSRN: or

Robert F. Bruner (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3823 (Phone)
434-924-0714 (Fax)


Casey Opitz

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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