Gainesboro Case Analysis

...

Exhibit 3

Zero dividend payment and 15% annual sales increase

GAINESBORO MACHINE TOOLS CORP.

Projections

Total

2005

2006

2007

2008

2009

2010

2011

2005-11

Sales

$ 870.1

$ 1,000.7

$ 1,150.8

$ 1,323.4

$ 1,521.9

$ 1,750.1

$ 2,012.7

$ 9,629.6

Sources:

Net income

$ 18.1

$ 40.0

$ 57.5

$ 72.8

$ 91.3

$ 98.0

$ 160.0

$ 537.8

Depreciation

$ 22.5

$ 25.5

$ 30.0

$ 34.5

$ 40.5

$ 46.5

$ 52.5

$ 252.0

Total

$ 40.6

$ 65.5

$ 87.5

$ 107.3

$ 131.8

$ 144.5

$ 212.5

$ 789.8

Uses:

Capital expenditures

$ 43.8

$ 50.4

$ 57.5

$ 66.2

$ 68.5

$ 78.8

$ 90.6

$ 455.7

Change in Working capital

$ 19.5

$ 22.4

$ 25.8

$ 29.6

$ 34.0

$ 38.5

$ 44.3

$ 214.1

Total

$ 63.3

$ 72.8

$ 83.3

$ 95.8

$ 102.4

$ 117.3

$ 134.9

$ 669.8

Excess cash/(Borrowing needs)

$ (22.7)

$ (7.3)

$ 4.2

$ 11.5

$ 29.4

$ 27.2

$ 77.6

$ 120.0

Dividend

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

After dividend

Excess cash/(Borrowing needs)

$ (22.7)

$ (7.3)

$ 4.2

$ 11.5

$ 29.4

$ 27.2

$ 77.6

$ 120.0

Gainesboro Machine Tool Corporation Case Study

Issue

In the case, the issue is pretty clear on what needs to take place. Gainesboro main issues are to determine whether or not to pay the shareholders a dividend, and what kind of dividend at that, or if the company should not declare a dividend and buy back stock instead. Also, there is the issue of the name change of the corporation, as they are in the process are dealing with a new technology and want to be branded as a different type of corporation with a different type of image that comes with.

Analysis

With Gainesboro looking to expand, the company debated on declaring dividends towards its shareholders, and whether to give back a 20% dividend, a 40% dividend, or no dividend at all. Exhibits 1 -3 show the projected sources and uses statement with each a 40% dividend, 20% dividend and no dividend declared and also factoring in the 15% sales growth increase the corporation is expecting to take place from 2005-2011. As you can see, the difference between the amount of cash between declaring a 40% dividend and not declaring a dividend is rather significant, totalling 215.1 million within the seven years. The problem is that with the sales increasing by 15% annually,