Gainesboro Historial Essay
FINANCE CAPSTONE TUTORIAL
How will Gainesboro’s various providers of capital, such as its stockholders and bankers, react to a declaration of no dividend? What about the announcement of a 40% payout? How would they react to a residual payout? Structure for presentation * Introduction * Gainesboro’s situation * Gainesboro’s strategy * Gainesboro’s Dividend background * Gainesboro’s Dividend policy * No dividend * Include advantages and disadvantages of having a zero-dividend policy * Affect on stockholders, bankers etc? * 40% payout * Include advantages and disadvantages of having a 40% payout of dividends * Affect? * Residual payout * Include advantage and disadvantages of having a …show more content…
residual payout * Affect?
Introduction – * Founded in 1923 by two engineers James Gaines and David Scarboro * The firm was initially manufacturing metal machinery parts. * Participated in the second world war by manufacturing metal parts for vehicles and tanks . * 1975 firm and entered in the machine tool industry. * In the 80’s the company made its entry in the Computer aided Design/Manufacuring ( CAD/CAM) working in cooperation in software company . * The figures were good in the 90s an Gainesboro continued to perfect its hardware and software. * Nevertheless , due to an increase in international competition and lack of development of user-friendly software at the beginning of the second century the revenue decreased by 17% in 5years from $911 million in 1998 to $757 million in 2004. * Dividend per share fell from $1.03 in 2001 to $0.25 in 2004. ( bringing the share price down from an average of $61 in 2003 to $29 in 2004
But that dividends are a signal of a firm’s earnings prospects and therefore the firm may be entering a period of low earnings, based on the dividends paid.
Brav et al. (2005) suggested that ‘dividend policy is conservative, driven mainly by the market’s asymmetric reaction to dividend increases and decreases.’
* But thanks to two restructuring in 2002 and 2004 for a total cost of $154 million, the company has been able to design a new product : THE ARTIFICIAL WORKFORCE
Gainesboro’s situation * Mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM (computer aided design and manufacturing) equipment manufacturer must submit a new dividend policy for the company to the Board of Directors. * Due to the Hurricane Katrina causing significant destruction in the south east part of United State, the stock market went down and Gainesboro’s stock had fallen about 18 % * Ashley Swenson has to decided wether pay shareholder dividends or buy back stock. * The company wants also change his name from Gainesboro Machine Tools to Gainesboro Advanced Systems International, Inc. which reflects a stronger emphasis on IT. Excpecting an improvement in the perception of the company. Gainesboro’s strategy
=== GOAL : grow at an average annual compound rate of15% * Big shift in the mix of production : ¾ sales of CAD/CAM ( 45% in 2004)while only ¼ sales of the traditionals presses and molds of the company (40% in 2004).( in 2004 15% was miscellaneous machine tools) * International expansion : Opening new field sales offices around the world. * Expansion through joint ventures and aqcuisition of small software companies.
Company Dividend background * Strong earning and predictable dividend grow from 1989 to 1998. * Decrease in earning and unchanged divided from 1999 to 2001 * Negative earnings (net losses) in 2002 and 2004 due to the implementation of restructuring programs. Decrease in dividends. * No dividend for the first two quarters of2005
YEAR | SALES/SHARE | EPS | DPS | CPS | 1989 | $14.52 | $0.45 | $0.18 | $0.97 | 1990 | 16.00 | 0.74 | 0.22 | 1.29 | 1991 | 22.25 | 1.59 | 0.31 | 2.05 | 1992 | 25.64 | 1.59 | 0.31 | 2.05 | 1993 | 27.19 | 2.29 | 0.40 | 2.83 | 1994 | 30.06 | 2.59 | 0.57 | 3.25 | 1995 | 31.66 | 2.61 | 0.72 | 3.34 | 1996 | 37.71 | 2.69 | 0.81 | 3.60 | 1997 | 40.69 | 2.56 | 0.86 | 3.62 | 1998 | 48.23 | 3.58 | 0.92 | 4.81 | 1999 | 43.59 | 2.79 | 1.03 | 4.25 | 2000 | 42.87 | 0.65 | 1.03 | 2.23 | 2001 | 41.48 | 0.35 | 1.03 | 2.00 | 2002 | 45.52 | (3.25) | 0.77 | 2.86 | 2003 | 43.28 | 0.69 | 0.25 | 1.99 | 2004 | 40.68 | (7.57) | 0.25 | (0.97) |
Gainseboro’s Dividend Policy
Because of different tax brackets and financing needs, stockholders invest in companies that suit their preferences regarding to dividend policy; this is called the clientele effect by Modigliani and Miller (1963, 431)
After the two first quarter of 2005 when no dividend has been payout, the directors declared in a special letter to shareholders their intention to continue the annual payout later in 2005.
3 possible dividend policies
ZERO DIVIDEND PAYOUT.
Advantage : * leave some capital for its research and development department . * no need to borrow to pay dividend. * make Gainesboro in tune with the industry as only one of the eight CAD/CAM companies in the case study pays a dividend + % of firm paying cash has dropped from 66.5 1978 to 20.8 in 1999 (market might react favorably)
CAD/CAM companies | Sales ($mm) | Current payout ratio (%) | Current dividend yield (%) | Autodesk, Inc | 1,234 | 6.0 | 0.3 | Ansys, Inc | 135 | 0.0 | 0.0 | Cadence Design | 1,198 | 0.0 | 0.0 | Intergraph Corp | 551 | 0.0 | 0.0 | Mentor Graphics | 711 | 0.0 | 0.0 | Moldflow Corp. | 49 | 0.0 | 0.0 | Parametric Technology Corp. | 660 | 0.0 | 0.0 | Synopsys, Inc | 1,092 | 0.0 | 0.0 |
* It rewards investors with capital gains
Disadvantage : * Lead to a decrease in share price * Bad signal for earnings of the company * As share price will decrease ,issuing share will be less effective so we will observe an increase in cost of raising capital externally. * Credit rating might decrease and cost of debt will increase.
Reaction of various providers of capital : * 26% of investors has strong preferences towards high dividend payout. * The founders’ families, holding 13% may not have a regular income, thus migh appreciated a dividend. * 13% of Gainesboro’s shareholding is short term trading oriented * 39% of shareholders will desaprouved if Gainesboro declared a no dividend in 2005.
Reactions;
* Shareholders: will not like the perceived idea of not having any dividends is not desired by any shareholders . Dividends are of a sticky nature and shareholders may sell off shares that fail to pay substantial dividends based on their individual expectations (we expect that shareholders expect some form of dividend) * Bankers: the conclusion of a zero dividend payout may be desired by bankers as the firm is not obtaining further debt, but instead may be able to use any excess funds to pay back current debt
40% DIVIDEND PAYOUT.
Advantage : * Beneficial for the firm’s share price ( but only if the earning increase) * Debt covenant reduce agency costs = good sign * Share price increase so external financing by share issues more effective.
Disadvantage : * 40% payout ratio will increase the cost of debt and put at risk it s investment opportunities * According to Asquith and Mullins (1986,36) dividend signalling is more effective for lower risk firms, which Gainesboro is not. * Raise the capital to pay dividend by borrowing more will lead to an increase of debt to equity ratio and consequently financial risk.
Reaction of various providers of capital : * Gainesboro’s shareholding is constituted at 26% of long term retirement investors. * 6% is growth term trading oriented * The employees and their families, holding 17% already have an income and thus do not need dividends; they are more interested in long term capital gains and thus will not react positively.
But Even though they already have an income shouldn’t they still be entitled to a dividend payout ? * if Gainesboro declares a dividend in 2005, debt holders will not be pleased.
Reactions: * Shareholders: shareholder might be satisfied by an increase in their share price but their reaction depend if they are looking for long term investment or short term trading * Bankers: the conclusion of a zero dividend payout may be desired by bankers as the firm is not obtaining further debt, but instead may be able to use any excess funds to pay back current debt
RESIDUAL PAYOUT.
Advantage : * leave some capital for its research and development department . * no need to borrow to pay dividend. * Prevent the firm from accumulating cash in the future so that the firm does not become a desirable takeover target. * Also it will make the firm’s dividends unpredictable , as dividends will vary depending whether there are positive NPV projects thus will be a better signal the firm’s risk profile .
Disadvantage : * The residual payout is purely dependent on the firm’s earnings and therefore shareholders may see vast disparities between dividends, based on the capacity of earnings which then may be reflected in the share price (via the market reactions).
To conclude we can see that Cutting dividends will facilitate raising capital internally, while a 40% payout ratio will facilitate raising capital externally (via issuing new shares). Finally a residual payout policy will also ease raising capital internally in addition of providing a lower risk of takeover in the future.
How will Gainesboro’s various providers of capital, such as its stockholders and bankers, react to a declaration of no dividend? What about the announcement of a 40% payout? How would they react to a residual payout? Structure for presentation * Introduction * Gainesboro’s situation * Gainesboro’s strategy * Gainesboro’s Dividend background * Gainesboro’s Dividend policy * No dividend * Include advantages and disadvantages of having a zero-dividend policy * Affect on stockholders, bankers etc? * 40% payout * Include advantages and disadvantages of having a 40% payout of dividends * Affect? * Residual payout * Include advantage and disadvantages of having a …show more content…
residual payout * Affect?
Introduction – * Founded in 1923 by two engineers James Gaines and David Scarboro * The firm was initially manufacturing metal machinery parts. * Participated in the second world war by manufacturing metal parts for vehicles and tanks . * 1975 firm and entered in the machine tool industry. * In the 80’s the company made its entry in the Computer aided Design/Manufacuring ( CAD/CAM) working in cooperation in software company . * The figures were good in the 90s an Gainesboro continued to perfect its hardware and software. * Nevertheless , due to an increase in international competition and lack of development of user-friendly software at the beginning of the second century the revenue decreased by 17% in 5years from $911 million in 1998 to $757 million in 2004. * Dividend per share fell from $1.03 in 2001 to $0.25 in 2004. ( bringing the share price down from an average of $61 in 2003 to $29 in 2004
But that dividends are a signal of a firm’s earnings prospects and therefore the firm may be entering a period of low earnings, based on the dividends paid.
Brav et al. (2005) suggested that ‘dividend policy is conservative, driven mainly by the market’s asymmetric reaction to dividend increases and decreases.’
* But thanks to two restructuring in 2002 and 2004 for a total cost of $154 million, the company has been able to design a new product : THE ARTIFICIAL WORKFORCE
Gainesboro’s situation * Mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM (computer aided design and manufacturing) equipment manufacturer must submit a new dividend policy for the company to the Board of Directors. * Due to the Hurricane Katrina causing significant destruction in the south east part of United State, the stock market went down and Gainesboro’s stock had fallen about 18 % * Ashley Swenson has to decided wether pay shareholder dividends or buy back stock. * The company wants also change his name from Gainesboro Machine Tools to Gainesboro Advanced Systems International, Inc. which reflects a stronger emphasis on IT. Excpecting an improvement in the perception of the company. Gainesboro’s strategy
=== GOAL : grow at an average annual compound rate of15% * Big shift in the mix of production : ¾ sales of CAD/CAM ( 45% in 2004)while only ¼ sales of the traditionals presses and molds of the company (40% in 2004).( in 2004 15% was miscellaneous machine tools) * International expansion : Opening new field sales offices around the world. * Expansion through joint ventures and aqcuisition of small software companies.
Company Dividend background * Strong earning and predictable dividend grow from 1989 to 1998. * Decrease in earning and unchanged divided from 1999 to 2001 * Negative earnings (net losses) in 2002 and 2004 due to the implementation of restructuring programs. Decrease in dividends. * No dividend for the first two quarters of2005
YEAR | SALES/SHARE | EPS | DPS | CPS | 1989 | $14.52 | $0.45 | $0.18 | $0.97 | 1990 | 16.00 | 0.74 | 0.22 | 1.29 | 1991 | 22.25 | 1.59 | 0.31 | 2.05 | 1992 | 25.64 | 1.59 | 0.31 | 2.05 | 1993 | 27.19 | 2.29 | 0.40 | 2.83 | 1994 | 30.06 | 2.59 | 0.57 | 3.25 | 1995 | 31.66 | 2.61 | 0.72 | 3.34 | 1996 | 37.71 | 2.69 | 0.81 | 3.60 | 1997 | 40.69 | 2.56 | 0.86 | 3.62 | 1998 | 48.23 | 3.58 | 0.92 | 4.81 | 1999 | 43.59 | 2.79 | 1.03 | 4.25 | 2000 | 42.87 | 0.65 | 1.03 | 2.23 | 2001 | 41.48 | 0.35 | 1.03 | 2.00 | 2002 | 45.52 | (3.25) | 0.77 | 2.86 | 2003 | 43.28 | 0.69 | 0.25 | 1.99 | 2004 | 40.68 | (7.57) | 0.25 | (0.97) |
Gainseboro’s Dividend Policy
Because of different tax brackets and financing needs, stockholders invest in companies that suit their preferences regarding to dividend policy; this is called the clientele effect by Modigliani and Miller (1963, 431)
After the two first quarter of 2005 when no dividend has been payout, the directors declared in a special letter to shareholders their intention to continue the annual payout later in 2005.
3 possible dividend policies
ZERO DIVIDEND PAYOUT.
Advantage : * leave some capital for its research and development department . * no need to borrow to pay dividend. * make Gainesboro in tune with the industry as only one of the eight CAD/CAM companies in the case study pays a dividend + % of firm paying cash has dropped from 66.5 1978 to 20.8 in 1999 (market might react favorably)
CAD/CAM companies | Sales ($mm) | Current payout ratio (%) | Current dividend yield (%) | Autodesk, Inc | 1,234 | 6.0 | 0.3 | Ansys, Inc | 135 | 0.0 | 0.0 | Cadence Design | 1,198 | 0.0 | 0.0 | Intergraph Corp | 551 | 0.0 | 0.0 | Mentor Graphics | 711 | 0.0 | 0.0 | Moldflow Corp. | 49 | 0.0 | 0.0 | Parametric Technology Corp. | 660 | 0.0 | 0.0 | Synopsys, Inc | 1,092 | 0.0 | 0.0 |
* It rewards investors with capital gains
Disadvantage : * Lead to a decrease in share price * Bad signal for earnings of the company * As share price will decrease ,issuing share will be less effective so we will observe an increase in cost of raising capital externally. * Credit rating might decrease and cost of debt will increase.
Reaction of various providers of capital : * 26% of investors has strong preferences towards high dividend payout. * The founders’ families, holding 13% may not have a regular income, thus migh appreciated a dividend. * 13% of Gainesboro’s shareholding is short term trading oriented * 39% of shareholders will desaprouved if Gainesboro declared a no dividend in 2005.
Reactions;
* Shareholders: will not like the perceived idea of not having any dividends is not desired by any shareholders . Dividends are of a sticky nature and shareholders may sell off shares that fail to pay substantial dividends based on their individual expectations (we expect that shareholders expect some form of dividend) * Bankers: the conclusion of a zero dividend payout may be desired by bankers as the firm is not obtaining further debt, but instead may be able to use any excess funds to pay back current debt
40% DIVIDEND PAYOUT.
Advantage : * Beneficial for the firm’s share price ( but only if the earning increase) * Debt covenant reduce agency costs = good sign * Share price increase so external financing by share issues more effective.
Disadvantage : * 40% payout ratio will increase the cost of debt and put at risk it s investment opportunities * According to Asquith and Mullins (1986,36) dividend signalling is more effective for lower risk firms, which Gainesboro is not. * Raise the capital to pay dividend by borrowing more will lead to an increase of debt to equity ratio and consequently financial risk.
Reaction of various providers of capital : * Gainesboro’s shareholding is constituted at 26% of long term retirement investors. * 6% is growth term trading oriented * The employees and their families, holding 17% already have an income and thus do not need dividends; they are more interested in long term capital gains and thus will not react positively.
But Even though they already have an income shouldn’t they still be entitled to a dividend payout ? * if Gainesboro declares a dividend in 2005, debt holders will not be pleased.
Reactions: * Shareholders: shareholder might be satisfied by an increase in their share price but their reaction depend if they are looking for long term investment or short term trading * Bankers: the conclusion of a zero dividend payout may be desired by bankers as the firm is not obtaining further debt, but instead may be able to use any excess funds to pay back current debt
RESIDUAL PAYOUT.
Advantage : * leave some capital for its research and development department . * no need to borrow to pay dividend. * Prevent the firm from accumulating cash in the future so that the firm does not become a desirable takeover target. * Also it will make the firm’s dividends unpredictable , as dividends will vary depending whether there are positive NPV projects thus will be a better signal the firm’s risk profile .
Disadvantage : * The residual payout is purely dependent on the firm’s earnings and therefore shareholders may see vast disparities between dividends, based on the capacity of earnings which then may be reflected in the share price (via the market reactions).
To conclude we can see that Cutting dividends will facilitate raising capital internally, while a 40% payout ratio will facilitate raising capital externally (via issuing new shares). Finally a residual payout policy will also ease raising capital internally in addition of providing a lower risk of takeover in the future.