Erfan gainesboro final-report-v-3.0

Case Study
On
Dividend Policy of Gainesboro Machine Tools
Corporation
Course Code: F-603
Course Title: Corporate Finance
Program: MBA (Evening)
Date of Submission: 14th
December, 2019
Prepared for-
Dr. Mahmood Osman Imam
Professor
Department of Finance
University of Dhaka
Prepared by-
Name ID
Md. Erfanul Hoque 38044
Afsana Ferdous 38007
Shamali Sarkar 38016
Zakir Hossain 39060
Mostafa Naymul Hossain 39068
Department of Finance
Faculty of Business Studies
University of Dhaka

DIVIDEND POLICY OF GAINESBORO MACHINE TOOLS CORPORATION 1
Letter of Transmittal
14.12.2019
To,
Dr. Mahmood Osman Imam,
Professor,
Department of Finance,
Faculty of Business Studies,
University of Dhaka
Subject: Term Paper Submission.
Dear Sir,
This is our immense pleasure submitting Term Paper based on the topic of “Dividend
Policy of Gainesboro Machine Tools Corporation”. This report has been prepared as
part of fulfilling the requirements for the course “Corporate Finance”. We have tried to
do our best to make a credible and effective paper. It has provided us practical
knowledge of how Corporate Finance concepts work in real situations, making the
classroom lessons more interesting and clearer. It allowed us to understand a thorough
understanding of the topic and we are confident that in the future this knowledge will
prove to be of utmost value and significance to us. With your kind and conscious mind,
we would like to express our profound gratefulness to you for accepting our report.
We apologize profusely for unintended errors, if any, made by us despite our best
efforts in preparing the report. I hope you'd be kind enough to receive this report and
oblige us thereby.
Sincerely yours,
Md. Erfanul Hoque 38044
Afsana Ferdous 38007
Shamali Sarkar 38016
Zakir Hossain 39060
Mostafa Naymul Hossain 39068

Acknowledgment
All praise goes to the Almighty who gave us the chance to produce this report. It is
instead a great pleasure for us to convey our deepest gratitude for giving us the
opportunity to prepare this report to the Department of Finance, Dhaka University.
Even if we worked a lot for our subject, the topic was quite challenging. The report
came through at the end, though, successfully.
First of all, we would very much like to express our sincere appreciation to course
instructor Teacher Dr. Mahmood Osman Imam, Professor, Department of Finance,
University of Dhaka for his kind and sincere supervision, constructive criticism and
personal assistance throughout our work. We would also like to mention all those who
inspired, motivated and supported us to successfully complete this report.
At last, we would like to convey our heartfelt gratitude to our classmates, who have
given us constant support and assistance throughout the preparation of this report.

Executive Summary
Dividend policy is the policy that a firm uses to structure its shareholders ' dividend
payout. Dividends are often part of the strategy of a company. They are, however,
under no obligation to repay dividends to shareholders. Most companies see a dividend
policy as an integral part of their corporate strategy. Management must decide on the
amount of the dividend, the timing and various other factors affecting dividend
payments.
This report has been prepared to analyze optimum Gainesboro Machine Tools
Corporation.
From the analysis of this case we have prepared the Porter’s Five forces analysis, SWOT
analysis to analyze the company and the industry it belongs to. Besides, we have also
analyzed 0%, 20%, 22%, 28%, 40% payout ratio scenario and residual income dividend
policy and tried to find out which dividend policy should be chosen. For calculation,
we have used the exhibits that are provided at the end of the case and the key
information that are provided inside the case.
The 40% pay-out ratio does not go with the requirements of the company. As they are
planning not to exceed the debt-equity ratio above 40% and they also want to announce
$0.2 dividend per share. However, it will increase the debt burden. On the other hand,
if the company wants to pay 0% dividend its shareholders will be depressed. In residual
dividend policy it will be hard for them to be a growth company. They can also go for
28%, 22% or 20% dividend pay-out. But in 28% and 22% both requirements of debt-
equity ratio and DPS do not get fulfilled. But in 20% pay-out ratio both the requirements
are fulfilled. So, we concluded that the company will be better off with the 20%
dividend policy.

Table of Contents
Chapter- I...............................................................................................................6
1.1. Objectives of the Study...................................................................................................6
1.2. Limitation of the Study ..................................................................................................6
1.3. Case Synopsis ..................................................................................................................6
1.4. Problem Statement..........................................................................................................9
Chapter- II...........................................................................................................10
2.1. Company Overview .....................................................................................................10
2.2. Gainesboro Machine Tools Corporation Porter Five Forces Analysis ..................10
Threats of New Entrants.................................................................................................... 10
Bargaining Power of Suppliers .......................................................................................... 11
Bargaining Power of Buyers .............................................................................................. 11
Threats of Substitute Products or Services ........................................................................ 11
Rivalry among the Existing Competitors........................................................................... 11
2.3. Gainesboro Machine Tools Corporation SWOT Analysis / Matrix .......................11
Strengths of Gainesboro Machine Tools Corporation – Internal Strategic Factors........... 11
Weakness of Gainesboro Machine Tools Corporation – Internal Strategic Factors........... 11
Opportunities for Gainesboro Machine Tools Corporation – External Strategic Factors . 12
Threats Gainesboro Machine Tools Corporation Facing - External Strategic Factors...... 12
Chapter- III .........................................................................................................13
3.1. Evaluation of different strategies................................................................................13
40% Dividend Pay-out or a dividend less than $0.2 per share.......................................... 13
Zero-Dividend Pay-out...................................................................................................... 14
Residual-Dividend Pay-out................................................................................................ 14
28% dividend pay-out........................................................................................................ 15
22% dividend pay-out........................................................................................................ 16
Below 40% Dividend Pay-out i.e. 20% Dividend Pay-out................................................ 17
Corporate Rebranding........................................................................................................ 17
Share Buyback.................................................................................................................... 18
Chapter- IV..........................................................................................................19
4.1. Recommendation ..........................................................................................................19

4.2. Conclusion .....................................................................................................................20
Appendix ..................................................................................................................................21

Chapter- I
1.1. Objectives of the Study
To understand current scenario of dividend payout ratio
To forecast the future health of the company
To analyze the four different payout policy and find out which one would secure the trust of
the investors
1.2. Limitation of the Study
The field on this study is very wide, but within a very short time, we had to finish the work.
Poor knowledge on dividend payout policies.
1.3. Case Synopsis
Gainesboro entered the new field of computer-aided design and computer-aided manufacturing
(CAD / CAM) in the early 1980s. By the end of 2004, CAD/CAM equipment and software were
responsible for about 45% of sales; presses, dies, and molds made up 40% of sales; and
miscellaneous machine tools were 15% of sales. Within the CAD/CAM industry, however, a
number of larger firms, including Autodesk, Inc., Cadence Design, and Synopsys, Inc., competed
for dominance of the growing market. Throughout the 1990s, Gainesboro helped set the standard
for CAD/CAM, but the aggressive entry of large foreign firms into CAD/CAM and the rise of
the U.S. dollar dampened sales. In the late 1990s and early 2000s, technological advances and
aggressive venture capitalism fueled the entry of highly specialized, state-of-the-art CAD/CAM
firms. As a result, revenues slipped from a high of $911 million, in 1998, to $757 million, in
2004.
In order to combat revenue declines and improve weak profit margins, Gainesboro took a two-
pronged approach.
In an effort to restore its leadership in the field, it devoted a greater share of its research
and development budget to CAD / CAM. The company underwent two massive
restructurings. In 2002, it sold two unprofitable lines of business with revenues of $51
million, sold two plants, eliminated five leased facilities, and reduced personnel.
Restructuring costs totaled $65 million.
Introduction

Then, in 2004, the company began a second round of restructuring by altering its
manufacturing strategy, re-focusing its sales and marketing approach, and implementing
operational procedures that required personnel and facilities to be further reduced. The
total cost of the operational restructuring in 2004 was $89 million.
Although the two restructurings produced losses totaling $202 million in 2002 and 2004, by
2005 the restructurings and the increased emphasis on CAD/CAM research appeared to have
launched a turnaround.
Gainesboro had developed applications of the product for the chemicals industry and for the oil-
and gas-refining industries in 2004 and, by the next year, it had created applications for the
trucking, automobile-parts, and airline industries.
By October 2004, when the first Artificial Workforce was shipped, Gainesboro had orders
totaling $75 million. By year end, the backlog was $100 million. The future for the product
looked bright. Gainesboro's management expected a total of $90 million in 2005 and $150
million in 2006 for domestic revenue from the Artificial Workforce series. Thereafter, growth in
sales would depend on the development of more system applications and the creation of system
improvements and add-on features. International sales were expected to provide additional
revenues of $150 million by as early as 2007. Currently, international sales accounted for
approximately 15% of total corporate revenues.
Details Remark
Nature of the company Resurgent company with potential growth in near future
Projected growth rate Compounding 15% per year
Projected market position 5% growth rate per year
Strategy Concentrate on: “Corporate Branding” to grow up the
image in the mind of the share holders
Action plan Expansion aggressively in the international arena
Financial strategy External debt; but not above 40% debt-equity ratio
Table 1: Managements point of view
Two factors that could affect sales were of some concern to Gainesboro:
Although the company had successfully patented several of the processes used by the
Artificial Workforce system, management had received hints through industry observers
that two strong competitors were developing comparable products and would probably
introduce them within the next 12 months.
Second, sales of molds, presses, machine tools, and CAD/CAM equipment and software
were highly cyclical, and current predictions about the strength of the U.S. economy were
not encouraging. Real GDP (gross domestic product) growth was expected to hover at a
steady but unimpressive 3.0% over the next few years. Industrial production, which had

improved significantly since 2001, would likely indicate a trend slightly downward next
year and the year after that.
Subject Details
USA GDP Growth rate are expected to steady
3% which is not satisfactory for
high consumer consumption
Competition Two strong company are
developing products and will be
launching by next 12 month
Table 2: Barriers to the future projection
Despite the macroeconomic environment, Gainesboro’s management remained optimistic
about the company’s prospects because of the successful introduction of the Artificial
Workforce series.
The firm’s recent payout of dividends can be found in the following table-
Year DPS EPS Remarks
2000 1.03 .65 Dividend exceeds earning
2001 1.03 .35 Dividend exceeds earning
2002 1.03 -3.25 Dividend exceeds earning
2003 .77 .69 Dividend exceeds earning
2004 .25 -7.57 Dividend exceeds earning
Table 3: Recent dividend payouts
During the company Life cycle, the company had gone for capital restructuring for two time:
Year Details Cost
2002 Selling off two unprofitable line ;5 leasing
facilities; reduced personnel
$51million
2004 Restructuring manufacturing strategy by
focusing on Sales and Marketing
$89million
Table 4: Capital Restructuring
Two restructuring incurs a total loss of $202 million dollar
Year Actual
/projection
Sales revenue
2004 Actual $100mill
2005 Projected $90million
2006 Projected $150 million
2007 Projected $ 300million ($150millon international sales)
Table 5: Impact of Capital Restructuring

Extensive research and development had initiated “Artificial workforce”- A system by which
ran on complex circuitry and highly advanced software that allowed the machine to
communicate each other electronically; mostly applied for trucking, automobiles-parts and
airline industry.
1.4. Problem Statement
Gainesboro had struggled over the past five years after years of traditionally strong earnings and
steady dividend growth. In response, two extensive restructuring programs were implemented
by management, both accompanied by net losses. After 2000, dividends have surpassed profits
for three years in a row. Then, in 2003, dividends were decreased to a level below earnings,
despite exceptional losses in 2004, a small dividend was declared by the board of directors. The
board did not declare a dividend for the first two quarters of 2005.
The question is that the company should use the proceeds of the company to pay dividends to
shareholders or buy back stock? If it pays dividend, which of the alternative dividend policies
should be recommended:
40% dividend payout or a dividend of around $ 0.20 a share
Zero-dividend payout
Residual-dividend payout
28% dividend payout
22% dividend payout
20% dividend payout

Chapter- II
2.1. Company Overview
Gainesboro Corporation was founded by two mechanical engineers, James Gaines and David
Scarboro, in Concord, New Hampshire, in 1923. Gainesboro had designed and manufactured a
number of machinery parts, including metal presses, dies, and molds. In the 1940s, the
company’s large manufacturing plant produced armored-vehicle and tank parts and
miscellaneous equipment. After the war, the company concentrated on the production of
industrial presses and molds, for plastics as well as metals. By 1975, the company had developed
a reputation as an innovative manufacturer of machine tools and industrial machines.
2.2. Gainesboro Machine Tools Corporation Porter Five Forces Analysis
Porter's Five Forces is a framework for analyzing a company's competitive environment. This
framework points out that the state of competition in any industry depends on five competitive
forces:
Threat of new entrants,
Threat of substitutes,
Bargaining Power of suppliers,
Bargaining Power of buyers and
Rivalry among industry’s firms.
Threats of New Entrants
According to the case of Gainesboro Corporation’s major entry barriers are-
Product differentiation
High capital requirements.
Patents issue
Large capital requirements though technological advances and aggressive venture
capitalism fuels the entry of highly specialized CAD/CAM firms.
Economies of scale
Governments regulations
Ownership of resources
Analysis of the Firm & Industry

Bargaining Power of Suppliers
Powerful suppliers affect the market through charging higher prices limiting products and by
integration. There are a smaller number of substitute inputs available against machine tools so
here bargaining of Gainesboro is moderate and supplier has also moderate bargaining power
against them. Technology &equipment are mainly supplied by the specific companies and by
themselves.
Bargaining Power of Buyers
Buyers are often a demanding lot. They want to buy the best offerings available by paying the
minimum price as possible. This put pressure on Gainesboro Machine Tools Corporation
profitability in the long run. The smaller and more powerful the customer base is of Gainesboro
Machine Tools Corporation the higher the bargaining power of the customers and higher their
ability to seek increasing discounts and offers.
Threats of Substitute Products or Services
Powerful buyers have the ability to reduce prices, demand better quality or more service and
play industry participants off against each other. Gainesboro Company is in powerful position
to bargain prices, demand better quality or additional service. Gainesboro companies seek to
obtain rights to invest in exploration and production areas internationally. These rights are
acquired through buying a percentage of another company’s right or through participating in
licensing rounds.
Rivalry among the Existing Competitors
Major machine tools companies are relatively equal in size, power and capabilities. This
increases the intensity of rivalry which can manifest itself in a price war if a competitor tries to
influence prices. But right now, there is not much rivalry in machine tool companies as all the
companies in association with World are working together as a new conglomerate.
2.3. Gainesboro Machine Tools Corporation SWOT Analysis / Matrix
Strengths of Gainesboro Machine Tools Corporation – Internal Strategic Factors
Value line rated it as an A company
Recently restructured
Artificial Workforce
They are expanding
Weakness of Gainesboro Machine Tools Corporation – Internal Strategic Factors
Top line and bottom line are falling
Dividends are not being paid
Very conservative

Opportunities for Gainesboro Machine Tools Corporation – External Strategic
Factors
World market
New technology innovation
Joint Ventures and acquisitions
Threats Gainesboro Machine Tools Corporation Facing - External Strategic
Factors
Macroeconomic environment is not conducive
New and big players are entering the market
Market shock
The competitors are catching up

Chapter- III
3.1. Evaluation of different strategies
The study of strategies and their consequences will be addressed in this section. The strength
and drawback of the strategies is discussed in accordance. with the supportive calculations which
are applicable.
40% Dividend Pay-out or a dividend less than $0.2 per share
If the company wants to declare a 40% pay-out ratio it may has to go beyond its earning. That
means it will have to have excess borrowing in almost every year from 2005-2011 just to pay
dividend. As it is more a value-based company it will need cash in hand for more R&D. But the
company will lose its flexibility if it pays 40% dividend of its earning. And also, debt of the
company will increase.
The values are as follows-
Year 2005 2006 2007 2008 2009 2010 2011
Dividend 7.3 16.0 23.0 29.1 36.5 39.2 64.4
Excess Cash/ Borrowing -29.8 -23.3 -18.8 -17.7 -7.2 -12 14.2
Debt/Equity Ratio (%) 37 40 41 41 39 37 34
DPS 0.39 0.78 1.02 1.18 1.34 1.31 1.95
Table-6: 40% Dividend Pay-out
Advantages:
It will create better impression to its stockholders.
Other competitors also pay dividend in this ratio, so it will better its competitiveness.
It will help the company to keep its dividend pay-out ratio as it always has maintained a
dividend pay-out ratio.
It will also be attractive for the value-based investors.
Disadvantages:
It will reduce the flexibility of the company.
Company will have negative earning every year if it pays these amounts of dividend.
It will change the current business model.
As it is a value-based company it will have to accept more debt as it will need more
capital.
Analysis & Evaluation

Debt equity ratio goes over 40%
Zero-Dividend Pay-out
By following a zero-dividend pay-out the company can avoid debt. Because it can use its earning
in other some other sectors. As it will not provide dividend it can also manage without taking
debt. Once the company is stable it will be able to declare dividend. But a future growth is
uncertain and depends on how the market or environment reacts. So, in this case the market and
the investors will have to be favourable. But if the company goes through loss and cannot declare
dividend for some back to back years some value-based investors will lose confidence on the
company which can cause negative effect.
The values are as follows:
Year 2005 2006 2007 2008 2009 2010 2011
Dividend 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Excess Cash/ Borrowing -22.5 -7.3 4.2 11.4 29.3 27.2 78.6
Table-7: Zero-Dividend Pay-out
Advantages:
Company can grow as high growth company.
There is no question of debt if the company earns and gives no dividend.
Effective for the long run.
Disadvantages:
Value based investors will not be pleased with this decision.
Gainseboro’s consistency of giving dividend will not be remained.
Residual-Dividend Pay-out
The company’s success of making a dividend pay-out depends on the ability to capitalise on the
new technology being implemented which in turn will able to implement production in fully
automated thus reducing the human capital and production cost. As it has already been
mentioned that competitors are planning to introduce similar technologies, the growth estimated
might have to be revisited. The growth projections taken optimistically, therefore making a pay-
out of 40% which might not be the best strategies. However, the pay-out ratio is inconsistent
depending on the growth of the company and it might upset the investor.
As the company is planning to introduce new technology to automate its workforce and reduce
its human capital and also the competitors are planning for the same strategy so the company
can only pay dividend if it earns out of its capital which will be used for the technology. If there

is earning after paying to the major stakeholders then the net earning can be distributed as
dividend.
Year 2005 2006 2007 2008 2009 2010 2011
Dividend 0.0 0.0 4.0 11.0 29.0 27.0 79.0
Excess Cash/ Borrowing -22.5 -7.3 4.2 11.4 29.3 27.2 78.6
DPS 0 0 0.18 0.44 1.06 0.90 2.40
Table-8: Residual-Dividend Pay-out
Advantages:
In this case debt will not be that much higher.
The capital which is collected for the new technology will be invested and the rest of the
earnings will be distributed as dividend.
This case goes with “dividend Irrelevance Theory” which means dividend will not affect
the investor’s return.
Disadvantages:
With this policy company growth is questionable.
Market condition will decide the dividend pay-out ratio.
28% dividend pay-out
Unlike 40% dividend pay-out the debt burden will be lower. 28% dividend pay-out policy has
been considered to see whether a below 40% dividend pay-out is more flexible or not.
Here it is also checked that a below 40% pay-out keeps the debt equity down or not. As it is a
28% dividend pay-out it will decrease debt burden. But in the meanwhile, the DPS will be above
$.20. Though the debt-equity ratio is below 40% consistently but still the DPS is higher.
Year 2005 2006 2007 2008 2009 2010 2011
Dividend 5.1 11.2 16.1 20.4 25.6 27.4 45.1
Excess Cash/ Borrowing -27.6 -18.5 -11.9 -9 3.7 -0.2 33.5
DPS 0.28 0.55 0.72 0.82 0.94 0.92 1.37
Table-9: 28% dividend pay-out

Advantages:
Debt burden will be less
More flexible than the 40% dividend pay-out
Debt-equity ratio is below 40%.
May ensure growth in the future
Disadvantages:
The DPS is still higher than $0.2
As the DPS is higher the intention of being a growth company may be delayed.
22% dividend pay-out
When the result of 28% dividend pay-out is also not as per requirement, 22% has been considered
to see whether it fulfils the requirements or not.
So, a 22% dividend pay-out is more favourable than 28% dividend pay-out. Though the DPS is
not less than $0.2 but it is just a little bit higher than that. If the shareholders are not happy, they
can think about this policy.
Year 2005 2006 2007 2008 2009 2010 2011
Dividend 4.0 8.8 12.7 16.0 20.1 21.6 35.4
Excess Cash/ Borrowing -26.5 -16.1 -8.4 -4.6 9.2 5.6 43.2
DPS 0.22 0.43 0.56 0.65 0.74 0.72 1.07
Table-10: 22% dividend pay-out
Advantages:
More flexible and more favourable than 28% and 40% pay-out ratio
Debt-equity ratio is consistently less than 40%
Lower debt burden
Easy to be a growth company
Disadvantages:
DPS is not less than $0.2
Borrowing will be more than the excess cash in hand.

Below 40% Dividend Pay-out i.e. 20% Dividend Pay-out
This strategy will imply debt burden to the company but not as high as the 40% dividend pay-
out. However, this strategy would have better financial flexibility and reduce yearly liability of
the company to the investors.
A 20% or less than 40% pay-out ratio will also help the company to maintain its impression of
declaring dividend. In this case though it will also increase the debt burden in some extent but
not as the 40% pay-out ratio. And also, the question regarding the flexibility of the company
with this pay-out ratio is answerable in a lot of sense. It will also maintain a good impression to
its value-based investors.
Year 2005 2006 2007 2008 2009 2010 2011
Dividend 3.7 8.0 11.5 14.6 18.3 19.6 32.2
Excess Cash/ Borrowing -26.2 -15.3 -7.3 -3.2 11 7.6 46.4
DPS 0.20 0.39 0.51 0.59 0.67 0.65 0.98
Table-11: Below 40% Dividend Pay-out i.e. 20% Dividend Pay-out
Advantages:
Consistent with Gainesboro’s dividend pay-out policy.
It will also help the company to keep its dividend pay-out ratio as it always has
maintained a dividend pay-out ratio.
It will also maintain dividend pay-out consistency of Gainesboro.
Board will continue to pay dividends.
With this pay-out ratio though company will have to take debt but still it will be flexible.
Disadvantages:
In some extent some investors may not be get pleased with this decision.
As some competitors are paying higher dividend it will have less competitiveness with
this pay-out ratio.
Corporate Rebranding
As a major part of corporate rebranding they want to change the name of the company from
Gainesboro Machine Tools Corporation to “Gainesboro Advanced Systems International, Inc”.
it will create a positive value in the market and also some factors will behave according to the
name of the company for example stock price. And also they can also bring change in the
dividend policy if needed. It will change the firm’s visibility and image nationally and
internationally which is a positive sign.

Advantages:
It will convey the message to the shareholders that the company will be now automation
(CAD/CAM) oriented.
It will also give an idea about the expansion of the company internationally.
Disadvantages:
It will cost almost 10 million. Which is expensive right now.
There is a risk of failure as there is no statistical data or evidence that change in the name
will give a rise in the stock prices.
Share Buyback
Share buyback sometimes can create a positive impact on the stockholders of the company.
Through this the company will find the answer of the question “Is Buyback is the right option?”
If share repurchase gives a higher return to the shareholders then they will be pleased.
As there are no points about free cash flow in the case then we may know whether the decision
is right or wrong through the intrinsic value or formula value of the share of the company. If the
intrinsic value is greater than the current share price then the company can go for the buyback
of the share.
But the dividend or financing problem is still there with this option. This option is unable to
resolve this. Gainesboro is trying to convey a message that they are a growth company. But share
repurchase may falsify the statement.
Advantages:
Repurchasing of share will give decision to the investor.
According to the management buyback of share will underestimate the stock value.
Disadvantages:
Lower EPS will cause loss to the company
Debt to equity ratio will be increased which indicates to high risk.

Chapter- IV
4.1. Recommendation
After the analysis above we saw some strategies like dividend payout percentage, share
repurchase etc. it would be feasible for them if they declare a dividend at a lower percentage
than 40% as they are going to go through a major restructuring with both name and labor type.
As the company is now projecting for 15% sales growth so this dividend pay-out suggestion is
based on the positive projection of this sales growth.
In view of the board put a commitment to pay the dividend in 2005, retracting its decision will
give negative impression or negative signal to the shareholders on the company business
operation status and this would jeopardize the company’s business strategy and initiatives as the
outcome of the restructuring as follows:
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.
To revitalize the operating divisions.
New products to penetrate the market with positive feedback since the product would
substitute the current products in the market.
Artificial workforce will increase and replace the existing workforce.
Hence, in meeting the Board commitment and shareholders expectation, based on the projection
dividend pay-out of 0%, 20%, 22%, 28% and 40%, it is suggested that a declaration of dividend
pay-out of 20% to shareholders is recommended due to the following reasons:
Based on the analysis and to keep the commitment of the company a 20% dividend payout
ratio is suggested for the company. This ratio is suggested due to following reasons:
The board decision and commitment of the management will be valued with this
decision. The company will still be able to pay dividend and also can focus on the growth.
No dividend payout ratio will cause negative impact to the shareholders. Which will
affect in the long run.
Through this procedure the shareholders will have value of the company’s growth and a
minimum return will be retained. Which is a positive sign for the company.
Recommendation & Conclusion

As there will be a major restructuring, shareholders will take decision in favor of the
company if even they get a little dividend.
Balancing is very important as there are two major competitors. This will help to balance
with the maximum debt capacity and also with the financial needs of the company. And
the debt-equity ratio should not exceed 40%.
Share repurchase will need a lot of money. Which will reduce the debt flexibility as to repurchase
share capital will be needed. And also, this will hamper the consistency of the company of
dividend pay-out. So, the company should decline the idea and go for 20% dividend pay-out
ratio.
4.2. Conclusion
In the meantime, it is suggested that the company to undergo corporate rebranding – reimagining.
Gainesboro in the new era with the restructuring with a target to have an efficient cost of
operation and new product in line namely Artificial Workforce will reflect company’s new
image. By changing its name from Gainesboro Machine Tools Corporation to “Gainesboro
Advanced Systems International, Inc” will reflect that the company is embarking or strategizing
the business in new advanced technology locally with the business expansion internationally
which would attract the investors’ attention to invest in the company anticipating positive growth
over a period of 5 years. By having a dividend pay-out of 20% will help the company to retain
and support the new image of CAD/CAM to 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 alliance in the same industry.

Appendix
Exhibit-1: Consolidated Income Statements

Exhibit-2: Consolidated Balance Sheets

Exhibit-2: Economic Indicators and Projections
Exhibit-4: Comparative Stockholder Data, 1994 and 2004 (in thousands of shares)

Exhibit-5: Per Share Financial and Stock Data

Exhibit-6: Comparative Industry Data, August 2005

Exhibit-7: Selected Healthy Companies with High and Zero Dividend Payouts, August
2005

Exhibit-8: Projected Sources and Uses Statement Assuming a 40% Payout Ratio (dollars
in million)

Analysis of 40% Dividend Pay-out
Equity Growth Rate
10%
Debt Calculation (31-12-2004)
Bank Loan 71345
Current Portion of Long-Term
Debt 150
Long Term Debt 8775
Total 80270
Total/1000 80.27
Gainesboro Machine Tools Corp
40% Dividend Payout
Assumptions 2005 2006 2007 2008 2009 2010 2011
1. Sales Growth Rate 15% 15% 15% 15% 15% 15% 15%
2. Net Income as % of
Sales 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%
3. Dividend Payout Ratio 40% 40% 40% 40% 40% 40% 40%
Projections 2005 2006 2007 2008 2009 2010 2011
2005-
11
Sales
870.
1
1000.
6
1150.
7
1323.
3
1521.
8
1750.
1
2012.
6 9629.2
Sources
Net Income 18.3 40.0 57.5 72.8 91.3 98.0 161.0 538.9
Depreciation 22.5 25.5 30 34.4 40.5 46.5 52.5 252
Total 40.8 65.5 87.5 107.2 131.8 144.5 213.5 790.9
Uses
Capital Expenditure 43.8 50.4 57.5 66.2 68.5 78.8 90.6 455.8
Change in Working
Capital 19.5 22.4 25.8 29.6 34 38.5 44.3 214.1
Total 63.3 72.8 83.3 95.8 102.5 117.3 134.9 669.9
Excess Cash/ Borrowing
(22.5
) (7.3) 4.2 11.4 29.3 27.2 78.6 121.0
Dividend 7.3 16.0 23.0 29.1 36.5 39.2 64.4 215.6
After Dividend
Needs
(29.8
)
(23.3
)
(18.8
)
(17.7
) (7.2)
(12.0
) 14.2 (94.5)
Borrowing 29.8 23.3 18.8 17.7 7.2 12 0 108.8
Excess Cash in Hand 0 0 0 0 14.2 14.2

Year 2005 2006 2007 2008 2009 2010 2011
Liability
421.
2 444.5 463.3 481 488.2 500.2 500.2
Equity
300.
1 330.1 363.1 399.4 439.4 483.3 531.6
Asset
721.
3 774.6 826.4 880.4 927.6 983.5
1031.
8
Cumiliative Debt
110.
1 133.4 152.2 169.9 177.1 189.1 189.1
Number of Shares
18.6
0 20.46 22.51 24.76 27.23 29.96 32.95

Analysis of Zero-Dividend Pay-out
0% Dividend Payout
Assumptions 2005 2006 2007 2008 2009 2010 2011
Sales 2% 4% 5% 6% 6% 6% 8%
Projections 2005 2006 2007 2008 2009 2010 2011
2005-
11
Sales
870.
1
1000.
6
1150.
7
1323.
3
1521.
8
1750.
1
2012.
6 9629.2
Sources
Net Income 18.3 40.0 57.5 72.8 91.3 98.0 161.0 538.9
Depreciation 22.5 25.5 30.0 34.4 40.5 46.5 52.5 252.0
Total 41 66 88 107 132 145 214
790.93
5
Uses
Change in Working
Capital 19.5 22.4 25.8 29.6 34.0 38.5 44.3 214.1
Total 63 73 83 96 103 117 135 669.9
-
22.5 -7.3 4.2 11.4 29.3 27.2 78.6 121.0
Dividend 0 0 0 0 0 0 0 0
After Dividend
Needs
-
22.5 -7.3 4.2 11.4 29.3 27.2 78.6 121.0
Borrowing 23 7 0 0 0 0 0 29.8
Excess Cash in Hand 4 11 29 27 79 150.7
Year 2005 2006 2007 2008 2009 2010 2011
Liability
421.
2 428.5 428.5 428.5 428.5 428.5 428.5
Equity
300.
1 330.1 363.1 399.4 439.4 483.3 531.6
Asset
721.
3 758.6 791.6 827.9 867.9 911.8 960.1
Cumulative Debt
102.
8 110.1 110.1 110.1 110.1 110.1 110.1

Analysis of Residual-Dividend Pay-out
Residual Dividend Payout
Assumptions 2005 2006 2007 2008 2009 2010 2011
1. Sales Growth Rate 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Sales 0.0 0.0 0.1 0.1 0.1 0.1 0.1
3. Dividend Payout Ratio 0.0 0.0 0.1 0.2 0.3 0.3 0.5
Projections 2005 2006 2007 2008 2009 2010 2011
2005-
11
Sales
870.
1
1000.
6
1150.
7
1323.
3
1521.
8
1750.
1
2012.
6 9629.2
Sources
Net Income 18.3 40.0 57.5 72.8 91.3 98.0 161.0 538.9
Depreciation 22.5 25.5 30.0 34.4 40.5 46.5 52.5 252.0
Total 41 66 88 107 132 145 214
790.93
5
Uses
Change in Working
Capital 19.5 22.4 25.8 29.6 34.0 38.5 44.3 214.1
Total 63 73 83 96 103 117 135 669.9
-
22.5 -7.3 4.2 11.4 29.3 27.2 78.6 121.0
Dividend 0 0 4 11 29 27 79
150.68
2
After Dividend
Needs
-
22.5 -7.3 0.0 0.0 0.0 0.0 0.0 -29.6
Borrowing 23 7 0 0 0 0 0 29.8
Excess Cash in Hand 0 0 0 0 0 0
Year 2005 2006 2007 2008 2009 2010 2011
Liability
421.
2 428.5 428.5 428.5 428.5 428.5 428.5
Equity
300.
1 330.1 363.1 399.4 439.4 483.3 531.6
Asset
721.
3 758.6 791.6 827.9 867.9 911.8 960.1
Cumulative Debt
102.
8 110.1 110.1 110.1 110.1 110.1 110.1
Number of Shares 18.6 20.46 22.51 24.76 27.23 29.96 32.95

40% Dividend Payout
Assumptions 2005 2006 2007 2008 2009 2010 2011
Sales 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%
Projections 2005 2006 2007 2008 2009 2010 2011
2005-
11
Sales
870.
1
1000.
6
1150.
7
1323.
3
1521.
8
1750.
1
2012.
6 9629.2
Sources
Net Income 18.3 40.0 57.5 72.8 91.3 98.0 161.0 538.9
Depreciation 22.5 25.5 30 34.4 40.5 46.5 52.5 252
Total 40.8 65.5 87.5 107.2 131.8 144.5 213.5 790.9
Uses
Change in Working
Capital 19.5 22.4 25.8 29.6 34 38.5 44.3 214.1
Total 63.3 72.8 83.3 95.8 102.5 117.3 134.9 669.9
(22.5
) (7.3) 4.2 11.4 29.3 27.2 78.6 121.0
Dividend 5.1 11.2 16.1 20.4 25.6 27.4 45.1 150.9
After Dividend
Needs
(27.6
)
(18.5
)
(11.9
) (9.0) 3.7 (0.2) 33.5 (29.9)
Borrowing 27.6 18.5 11.9 9 0 0.2 0 67.2
Year 2005 2006 2007 2008 2009 2010 2011
Liability
421.
2 439.7 451.6 460.6 460.6 460.8 460.8
Equity
300.
1 330.1 363.1 399.4 439.4 483.3 531.6
Asset
721.
3 769.8 814.7 860.0 900.0 944.1 992.4
Cumulative Debt
107.
9 126.4 138.3 147.3 147.3 147.5 147.5
Number of Shares
18.6
0 20.46 22.51 24.76 27.23 29.96 32.95

40% Dividend Payout
Assumptions 2005 2006 2007 2008 2009 2010 2011
Sales
2.1
% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%
Projections 2005 2006 2007 2008 2009 2010 2011
2005-
11
Sales
870.
1
1000.
6
1150.
7
1323.
3
1521.
8
1750.
1
2012.
6 9629.2
Sources
Net Income 18.3 40.0 57.5 72.8 91.3 98.0 161.0 538.9
Depreciation 22.5 25.5 30 34.4 40.5 46.5 52.5 252
Total 40.8 65.5 87.5 107.2 131.8 144.5 213.5 790.9
Uses
Change in Working Capital 19.5 22.4 25.8 29.6 34 38.5 44.3 214.1
Total 63.3 72.8 83.3 95.8 102.5 117.3 134.9 669.9
(22.
5) (7.3) 4.2 11.4 29.3 27.2 78.6 121.0
Dividend 4.0 8.8 12.7 16.0 20.1 21.6 35.4 118.6
After Dividend
Needs
(26.
5)
(16.1
) (8.4) (4.6) 9.2 5.6 43.2 2.5
Borrowing 26.5 16.1 8.4 4.6 0 0 0 55.6
Year 2005 2006 2007 2008 2009 2010 2011
Liability
421.
2 437.3 445.7 450.3 450.3 450.3 450.3
Equity
300.
1 330.1 363.1 399.4 439.4 483.3 531.6
Asset
721.
3 767.4 808.8 849.7 889.7 933.6 981.9
Cumulative Debt
106.
8 122.9 131.3 135.9 135.9 135.9 135.9
Number of Shares
18.6
0 20.46 22.51 24.76 27.23 29.96 32.95
Analysis of Below 40% Dividend Pay-out i.e. 20% Dividend Pay-out

20% Dividend Payout
Assumptions 2005 2006 2007 2008 2009 2010 2011
Sales 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%
Projections 2005 2006 2007 2008 2009 2010 2011
2005-
11
Sales
870.
1
1000.
6
1150.
7
1323.
3
1521.
8
1750.
1
2012.
6 9629.2
Sources
Net Income 18.3 40.0 57.5 72.8 91.3 98.0 161.0 538.9
Depreciation 22.5 25.5 30 34.4 40.5 46.5 52.5 252
Total 40.8 65.5 87.5 107.2 131.8 144.5 213.5 790.9
Uses
Change in Working
Capital 19.5 22.4 25.8 29.6 34 38.5 44.3 214.1
Total 63.3 72.8 83.3 95.8 102.5 117.3 134.9 669.9
(22.5
) (7.3) 4.2 11.4 29.3 27.2 78.6 121.0
Dividend 3.7 8.0 11.5 14.6 18.3 19.6 32.2 107.8
After Dividend
Needs
(26.2
)
(15.3
) (7.3) (3.2) 11.0 7.6 46.4 13.2
Borrowing 26.2 15.3 7.3 3.2 0 0 0 52
Excess Cash in Hand 0 0 11 7.6 46.4 65
Year 2005 2006 2007 2008 2009 2010 2011
Liability
421.
2 436.5 443.8 447 447 447 447
Equity
300.
1 330.1 363.1 399.4 439.4 483.3 531.6
Asset
721.
3 766.6 806.9 846.4 886.4 930.3 978.6
Cumulative Debt
106.
5 121.8 129.1 132.3 132.3 132.3 132.3
Number of shares
18.6
0 20.46 22.51 24.76 27.23 29.96 32.95

Erfan gainesboro final-report-v-3.0

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