Gainesboro Machine Tools Corporation †Essay Essay

Executive SummaryGainesboro Corpoproportionn was a company who designed and manufactured a number of machinery parts, including metal presses, dies, and molds. The company was found in 1923 in Concord, New Hampshire, by two mechanical engineers, James Gaines and David Scarboro. The two men had gone to school together and were disenchanted with their prospects as mechanics at a farm equipment manufacturer. In the 1940s Gainesboro produced armored-vehicle and tank parts and miscellaneous equipment for the war effort. And then in the early 1980s, they focused on manufacturing machinery parts, war equipment, and now entered saucy field of computer aided design and computer aided manufacturing (CAD/CAM).ObjectiveAshley Swenson, chief fiscal officer (CFO) in mid-September 2005 needed to submit recommendation to Gainesboros board of directors regarding the companys dividend policy. The Gainesboros stock as well as f solelyen 18%to $22.15 due to post impact of the Hurricane Katrina. Now, A shley Swensons dividend decision problem was compound by the dilemma of whether to use company funds to pay circumstancesholder dividends or to buy back stock.AnalysisBuy-back StockStock Price per share = $22.15Net income in year 2005 = $18,018,000Number of shares = 18,600,000 shares (assumed number in year 2004 isstill the same with year 2005)Earnings per share = $0.98Price to earnings balance ( P/E Ratio)=(Price per share)/EPSPE Ratio=22.15/0.98=22.6Number of retired shares=(Net income)/(Price per share)Number of retired shares=18,018,000/22,15=813,453.72813,454Therefore, number of shares outstanding=18,600,000-813,454=17,786,546 sharesThen we can calculate the new EPS after salvation stock,Earnings per Share (EPS) =(Net income)/(Number of shares)EPS =$18,018,000/17,786,546=$1,013Thus, the new market value is =EPS x PE Ratio=1.013 x 22.6=$22.89 It can be seen that by buying back the stock, the market scathe can increase for 3.34%.Pay shareholders dividenda. Zero dividend pay out PolicyThis policy required the company provide not pay dividend from 2005 to 2011.In the year 2005, The company outlay was about $63.3 one one thousand thousand million dollars but the amount of the total sources was only $40 million, so in order to balanced the company financial condition, the company borrowed $22.7 million. The same thing was also happened in 2006, the company borrowed $7.3 million (total expenditure $72.8 million total source $65.5 million). From 2007 to 2011, the company supererogatory interchange are positive ($4.2, $11.5, $29.4, $27.2, $77.6) million, these situation happened because the total expenditure remained lower than the company total source, so the company did not stupefy to borrowing needs.So, by sum all of the excess cash and the borrowed money info from 2005 to 2011, we can calculate that the company total excess cash is $120 million. This kind of policy has the best impact on companys financial condition because of the absence of divide nd that will reduce the companys retained earnings. Retained earning posses a greater role to make sure the company runs smoothly in the future by using minimum portion of debt required on a project, reflected in the industrial zero-dividend payout ratio.b. 40% dividend PayoutFrom data in face 8, 40% dividend payout means that the company will pay dividend 40% from net income from year 2005 to 2011. This results and the total excess cash for borrowing needs from 2005 to 2011 is ($95.1) million.The company will do borrowing from year 2005 to 2010. Amount of money borrowed respectively, ($29.9), ($23.3), ($18.8), (17.6), ($7.2), and ($12.0). All of the value comes from deduction of the total expenditures tothe total sources.Year 2011 the company will get $13.6 million excess cash ($212.5 million $134.9 million). $134.9 million is from the total expenditures (capital expense + change in working capital). And $212.5 million comes from the total sources (net income + depreciation).By sum up all of values (excess cash and borrowed money) from year 2005 to 2011 we get the total cash flow of ($95.1) million. By raise dividend payout from 31.4% in 2004, 140,784(Net income)/0.25(dividend per share) to 40% company need excess cash 95.1 million only in 2011 the company gain profit. The following is the calculation tablec. Residual-payout DividendThe following is the calculation for the residual-dividend payoutBy applying residual payout policy, at the total of excess cash from year 2005 to year 2011, Gainesboro still experiences negative cash. It means they will still have to borrow extra cash to pay the dividend.Conclusion and tributeBased on the market price value, EPS, and P/E Ratio calculation, the companys stock will have higher market price if they buy back the stock. Therefore, its recommended to buy back stock instead of paying dividend. It is also supported by the comparison between zero payout dividend, 40% payout ratio, and residual-payout. The best ending cash the company has is when they do zero payout ratio, which means they dont give dividend at certain years. Since, to pay the dividend they will have borrowing need forcing them to increase the debt level. Meanwhile, they current debt level is already higher than the maximum level management expect which is 40%. The year 2005 debt to equity ratio is 140%. Also, without paying dividend, the company still can attract investors. It is shown from the P/E ratio that is in average if compared to other similar companies.