Gainesboro Machine Tools Corporation †Essay Essay

executive SummaryGainesboro Corporation was a connection who designed and manufactured a number of machinery parts, including metal presses, dies, and molds. The society was found in 1923 in Concord, freshly Hampshire, by two mechanical engineers, James Gaines and David Scarboro. The two men had at rest(p) to school to beather and were disenchanted with their prospects as mechanics at a farm equipment manufacturer. In the 1940s Gainesboro produced armored-vehicle and tank parts and miscellaneous equipment for the warfare effort. And then in the early 1980s, they focused on manufacturing machinery parts, war equipment, and without delay entered new field of computer assist design and computer aided manufacturing (CAD/CAM).ObjectiveAshley Swenson, chief financial officer (CFO) in mid-September 2005 needed to bump recommendation to Gainesboros board of directors regarding the phoners dividend policy. The Gainesboros convey also f aloneen 18%to $22.15 due to post impact of the H urricane Katrina. Now, Ashley Swensons dividend decision problem was compounded by the dilemma of whether to use order funds to liquidate shareholder dividends or to buy back stock. abbreviationBuy-back StockStock Price per share = $22.15Net income in stratum 2005 = $18,018,000Number of shares = 18,600,000 shares (assumed number in socio-economic class 2004 is nonetheless the said(prenominal) with form 2005) wampum per share = $0.98Price to earnings ratio ( P/E Ratio)=(Price per share)/EPSPE Ratio=22.15/0.98=22.6Number of retired shares=(Net income)/(Price per share)Number of retired shares=18,018,000/22,15=813,453.72813,454Therefore, number of shares capital=18,600,000-813,454=17,786,546 sharesThen we can calculate the new EPS after repurchase stock,Earnings per Share (EPS) =(Net income)/(Number of shares)EPS =$18,018,000/17,786,546=$1,013Thus, the new market expenditure is =EPS x PE Ratio=1.013 x 22.6=$22.89 It can be seen that by buying back the stock, the market toll ca n increase for 3.34%.Pay shareholders dividenda. Zero dividend payout PolicyThis policy required the fellowship volition not pay dividend from 2005 to 2011.In the year 2005, The company expenditure was or so $63.3 one million million dollars but the amount of the measure sources was only $40 million, so in order to balanced the company financial condition, the company borrowed $22.7 million. The same thing was also happened in 2006, the company borrowed $7.3 million (total expenditure $72.8 million total source $65.5 million). From 2007 to 2011, the company excess cash are optimistic ($4.2, $11.5, $29.4, $27.2, $77.6) million, these situation happened because the total expenditure remained lower than the company total source, so the company did not arrive at to borrowing needs.So, by sum all of the excess cash and the borrowed money data from 2005 to 2011, we can calculate that the company total excess cash is $120 million. This kind of policy has the beat out impact on comp anys financial condition because of the absence of dividend that will reduce the companys retained earnings. Retained earning posses a greater role to make sure the company runs smoothly in the future by using minimum portion of debt required on a project, reflected in the industrial slide fastener-dividend payout ratio.b. 40% dividend PayoutFrom data in usher 8, 40% dividend payout means that the company will pay dividend 40% from electronic network income from year 2005 to 2011. This results and the total excess cash for borrowing needs from 2005 to 2011 is ($95.1) million.The company will do borrowing from year 2005 to 2010. Amount of money borrowed respectively, ($29.9), ($23.3), ($18.8), (17.6), ($7.2), and ($12.0). only of the value comes from deduction of the total expenditures tothe total sources.Year 2011 the company will get $13.6 million excess cash ($212.5 million $134.9 million). $134.9 million is from the total expenditures (capital expense + change in working ca pital). And $212.5 million comes from the total sources (net income + depreciation).By sum up all of values (excess cash and borrowed money) from year 2005 to 2011 we get the total cash flow of ($95.1) million. By raise dividend payout from 31.4% in 2004, 140,784(Net income)/0.25(dividend per share) to 40% company need excess cash 95.1 million only in 2011 the company gain profit. The following is the advisement tablec. Residual-payout DividendThe following is the calculation for the residual-dividend payoutBy applying residual payout policy, at the total of excess cash from year 2005 to year 2011, Gainesboro still experiences negative cash. It means they will still have to borrow extra cash to pay the dividend.Conclusion and Recommendation ground on the market price value, EPS, and P/E Ratio calculation, the companys stock will have higher market price if they buy back the stock. Therefore, its recommended to buy back stock kinda of paying dividend. It is also supported by the co mparison between zero point payout dividend, 40% payout ratio, and residual-payout. The best ending cash the company has is when they do zero payout ratio, which means they dont give dividend at certain years. Since, to pay the dividend they will have borrowing need forcing them to increase the debt aim. Meanwhile, they current debt level is already higher than the maximum level management expect which is 40%. The year 2005 debt to equity ratio is 140%. Also, without paying dividend, the company still can attract investors. It is shown from the P/E ratio that is in mediocre if compared to other similar companies.