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4.0 Recommendation
5.0 Appendices
1.0 Company Profile of Gainesboro Machine Tools Corporation
James Gaines and David Scarboro founded Gainesboro Corporation
in the year 1923 focusing their business on designing and
manufacturing machine parts. By 1975, the company had
developed a reputation as an innovative producer of industrial
machinery and machine tools, which made Gainesboro stood out
as an industry leader as press and mold companies were mostly
small local or regional firms with limited clientele.
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facilities and reduced personnel. Restructuring cost
totaled $65 million.
ii) In 2004, the company took second round
of restructuring by altering its manufacturing
strategy, refocusing its sales and marketing approach
and adopting administrative procedures that allowed
for further reduction in staff and facilities. Total cost
of the operational restructuring in 2004 was $89
million.
iii) These two restructuring produced losses
totalling $202 million in 2002 and 2004 but by 2005,
the restructurings and emphasis on CAD/ CAM
research which made the company leaner, and
research also led to the development of a system that
Gainesboros management believed would redefine
the industry.
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million in 2006. International sales through Gainesboros existing
offices were expected to provide additional revenues of $150
million by early 2007. Currently, the international sales accounted
for approximately 15% of total corporate revenues.
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recommendation to Gainesboros Board of Directors regarding the
companys dividend policy, a subject of an ongoing debate among
the firms senior managers. Large number of companies had
announced plans to buy back stock, while some want to signal
confidence of their companies and the U.S. financial markets.
Swenson has dividend-decision problem which compounded by the
dilemma of whether the company should use companys funds to
pay shareholders dividends or to buy back stock.
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Advantages:
Disadvantages:
Advantages:
1. Consistent with Gainesboros dividend payout policy
2. Board will continue to pay dividends
3. Uses debt capacity but still has flexibility
Disadvantages:
1. Did not give good impression to the investor on the companys future
2. Still higher that the other advanced technology companies
Advantages:
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Disadvantages:
Advantages:
1. Fund receive to be utilize in projects and capitalise new technology while
the excess funds is to build trust with investor.
2. Consistent with Dividend Irrelevance Theory which state that investor
will obtain the same return even if company pay high dividends or
reinvest the fund.
3. Debt will not be so high
Disadvantages:
1. Does not in line with company growth strategy
2. Dividend payout ratio is not predictable
3. Negative influence on the stocks prices during its implementations
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strategizing the business in technology locally and internationally
which will attract more investor. With this objective, they can
enhance the firms visibility and image as such stock prices will
respond positively to the campaign and name changes.
Advantages:
1. Indication to shareholders that company commit to future growth and
locally and international expansion strategy
2. Indication that company business will change from traditional machine
tool to CAD/CAM
Disadvantages:
1. The campaign is costly. Approximately 10 million
2. No empirical evidence show correlation between name changes and
stock price
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may be inconsistent with the message that Gainesboro is trying to
convey, which is that it is a growth company.
Advantages:
1. The management believes that repurchase share will estimate the stock
to be undervalued.
2. By repurchase share will give decision to the investor.
Disadvantages:
1. Increasing the debt to equity, makes debt riskier (Investor).
2. Loss for the company (EPS is lower).
3. Increasing the debt to equity (Higher risk)
4.0 Recommendation
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i. Corporate rebranding - reimaging Gainesboro with a
campaign of corporate-image advertising and change of
name to Gainesboro Advanced Systems International, Inc in
order to improve perception in the market.
ii. To revitalize the operating divisions
iii. New products to penetrate the market with positive feedback
since the product would substitute the current products in the
market.
iv. Company A rating rated by Value Line
v. Artificial workforce will increase and replace the existing
workforce
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disbursement of free cash flow towards achieving the
projection from 2005 until 2011. The company needs to
compete with two strong competitors who developing
comparable products and would launch the products in 12
months. This would disrupt the sales growth projected should
the company delay to meet the orders.
iv. The debt to equity ratio is not more than 40% which normally
gives comfort level to the lenders since the lender's interests
are better protected in the event of business decline; since the
Value Line rated A for the company.
By proposing the dividend payout of 20% and with the
positive projection of sales and net income throughout the years
until 2011, Swenson may decline to consider the share repurchase
since this will breach the company dividend payout commitment
which had been declared to the shareholders. Based on the
analysis above also it is also suggested that no major benefit will
be earned by the company by doing share repurchase since the
proposed dividend payout declaration of 20% couple with the
strategic restructuring initiatives and new product in line will
rebound the company financial performance. On top of this, the
company will lose its debt capacity flexibility since the company is
using its money to repurchase its own shares instead declaring
dividend and invest in new investment in artificial workforce. It
will also reduce its cash reserves or debt capacity and potentially
affect its credit rating.
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which would attract the investors attention to invest in the
company anticipating positive growth over a period of 5 years. By
having a dividend payout of 20% will help the company to retain
and support the new image of CAD/CAM focus as a true industry
leader in competition with others including Autodesk, Inc., Cadene
Design, and Synopsys, Inc.. This is strategically in line with the
growing market and aggressive marketing strategy, efficient
production in developing its new product in competing with its
other two (2) alliance in the same industry.
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