Gainesboro Machine Tools Corporation

19 Pages Posted: 21 Oct 2008

See all articles by Robert F. Bruner

Robert F. Bruner

University of Virginia - Darden School of Business

Sean Carr

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

In mid-September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM (computer aided design and manufacturing) equipment manufacturer must decide whether to pay out dividends to the firm's shareholders, or repurchase stock. If Swenson chooses to pay out dividends, she must also decide on 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) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share repurchase decisions. This case can follow a treatment of the Miller Modigliani dividend-irrelevance theorem and serves to highlight practical considerations in setting dividend policy.

Excerpt

UVA-F-1489

Version 2.0

GAINESBORO MACHINE TOOLS CORPORATION

In mid-September 2005, Ashley Swenson, chief financial officer (CFO) of Gainesboro Machine Tools Corporation, paced the floor of her Minnesota office. She needed to submit a recommendation to Gainesboro's board of directors regarding the company's dividend policy, which had been the subject of an ongoing debate among the firm's senior managers. Compounding her problem was the uncertainty surrounding the recent impact of Hurricane Katrina, which had caused untold destruction across the southeastern United States. In the weeks after the storm, the stock market had spiraled downward and, along with it, Gainesboro's stock, which had fallen 18%, to $ 22.15. In response to the market shock, a spate of companies had announced plans to buy back stock. While some were motivated by a desire to signal confidence in their companies as well as in the U.S. financial markets, still others had opportunistic reasons. Now, Ashley Swenson's dividend-decision problem was compounded by the dilemma of whether to use company funds to pay shareholder dividends or to buy back stock.

Background on the Dividend Question

After years of traditionally strong earnings and predictable dividend growth, Gainesboro had faltered in the past five years. In response, management implemented two extensive restructuring programs, both of which were accompanied by net losses. For three years in a row since 2000, dividends had exceeded earnings. Then, in 2003, dividends were decreased to a level below earnings. Despite extraordinary losses in 2004, the board of directors declared a small dividend. For the first two quarters of 2005, the board declared no dividend. But in a special letter to shareholders, the board committed itself to resuming payment of the dividend as soon as possible—ideally, sometime in 2005.

. . .

Keywords: dividend policy, share repurchases, corporate financial strategy financial markets policy, buybacks

Suggested Citation

Bruner, Robert F. and Carr, Sean, Gainesboro Machine Tools Corporation. Darden Case No. UVA-F-1489, Available at SSRN: https://ssrn.com/abstract=909921

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)

HOME PAGE: http://faculty.darden.edu/brunerb/

Sean Carr

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4812 (Phone)

HOME PAGE: http://www.batteninstitute.org

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,758
Abstract Views
7,698
rank
7,776
PlumX Metrics