Gainesboro Machine Tools Case Summary
Autor: Maryam • December 24, 2018 • 871 Words (4 Pages) • 765 Views
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- GMTC wanted an average annual compound growth rate of 15%. To achieve this growth goal, management proposed a strategy relying on three key points:
- Shift the mix of production towards CAD/CAM and peripheral products
- Expand aggressively in the international arena (half of its profits and sales by 2011)
- Expand through joint ventures and acquisitions of small software companies, which would provide half of the new products through 2011
- GMTC wants to add debt to its capital structure, but lower than 40% D/E ratio
Case Perspective (audience for the case analysis):
Perspective of GMTC management
Decision Alternatives:
Possible dividend policies:
- Zero-dividend payout: justified through firm’s strategic emphasis on advanced tech and CAD/CAM
- Signal that the company would be high-growth/tech firms
- Imply the market expected strong capital appreciation
- 40% dividend payout ($0.20 a share)
- Restore the firm to an annual implied dividend of $0.80 a share
- Highest since 2001
- Justified by expected increase in orders and sales
- High dividend signaled that company conquered its problems
- Residual-dividend payout: dividends only after all positive NPV projects
Image Advertising and Name Change:
- Name change because of new products and new company focus
- Objective to enhance the firm’s visibility and image
- Critics of this plan “raise stock price by “marketing” our share?”
Analyses and methodologies (how will you evaluate the problem?):
Methodologies:
- Cash budget analysis
- Sources and uses
- Sensitivity analysis
Initial Recommendation and Rationale (based on your reading of the case):
My initial recommendation is to adopt a residual dividend policy because this way the company maximizes shareholder value. Although the company promised to resume dividend payments, the company wants to adopt a high-growth image. High growth stock usually do not issue dividends during its growth period, but this residual-dividend policy is somewhat in the middle.
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