Eastboro Machine Tools Corporation
STATEMENT OF THE PROBLEM
Although this case presents several different issues to consider, the underlying problem is the correct implementation of Eastboro's dividend policy. Eastboro was founded as a manufacturer of machine parts, and has traditionally paid a fairly substantial dividend. However, in recent years, the core focus of the company has shifted toward technology in the fields of computer-aided design and manufacturing, highlighted by its latest development, Artificial Workforce.
This shift in the focus of Eastboro has brought about some financial changes as well. With revenues falling, they have missed two quarters' worth of dividend payments, and have promised to try to begin repayment of them by the end of 2001. However, to do this, they may need to borrow money, not only in 2001, but in the next several years. Eastboro has always been debt averse, so this is an unsettling prospect for them. There are several options being discussed, such as a zero-dividend payout, a 40% payout, and a residual payout policy. This major issue, as well as what direction the firm is going, and whether that corresponds to the wishes of current shareholders are the main issues needing to be addressed by Ms. Campbell.
FACTS
Current dividend policy = 40%
Attacks on World Trade Center and Pentagon occurred one week prior
Stock has fallen 18% since attacks
Firm has committed itself to resuming dividend payout, presumably in 2001
Potential name change to Eastboro Advanced Systems International, Inc.
Rated as an "A" company by Value Line
Recent decline in net revenues and profit margins
Future international growth is expected
Involved in high cyclical environment
GDP expected to fall from 4% to 1.6%
Largest % of individual investors are focused on retirement needs
Largest % of institutional investors are value-oriented
Management expects growth of 15%
CAD/CAM and cutting edge technological products will account for 75% of sales in future
Expansion through joint
Although this case presents several different issues to consider, the underlying problem is the correct implementation of Eastboro's dividend policy. Eastboro was founded as a manufacturer of machine parts, and has traditionally paid a fairly substantial dividend. However, in recent years, the core focus of the company has shifted toward technology in the fields of computer-aided design and manufacturing, highlighted by its latest development, Artificial Workforce.
This shift in the focus of Eastboro has brought about some financial changes as well. With revenues falling, they have missed two quarters' worth of dividend payments, and have promised to try to begin repayment of them by the end of 2001. However, to do this, they may need to borrow money, not only in 2001, but in the next several years. Eastboro has always been debt averse, so this is an unsettling prospect for them. There are several options being discussed, such as a zero-dividend payout, a 40% payout, and a residual payout policy. This major issue, as well as what direction the firm is going, and whether that corresponds to the wishes of current shareholders are the main issues needing to be addressed by Ms. Campbell.
FACTS
Current dividend policy = 40%
Attacks on World Trade Center and Pentagon occurred one week prior
Stock has fallen 18% since attacks
Firm has committed itself to resuming dividend payout, presumably in 2001
Potential name change to Eastboro Advanced Systems International, Inc.
Rated as an "A" company by Value Line
Recent decline in net revenues and profit margins
Future international growth is expected
Involved in high cyclical environment
GDP expected to fall from 4% to 1.6%
Largest % of individual investors are focused on retirement needs
Largest % of institutional investors are value-oriented
Management expects growth of 15%
CAD/CAM and cutting edge technological products will account for 75% of sales in future
Expansion through joint