GAINESBORO MACHINE TOOLS CORPORATIONSynopsis and ObjectivesIn mid September 2005, Ashley Swenson, the chief financial officer (CFO) ofa large computer-aided design and computer-aided manufacturing (CAD/CAM)equipment manufacturer needed to decide whether to pay out dividends to the firmâsshareholders, or to repurchase stock. If Swenson chose to pay out dividends, shewould have to also decide upon the magnitude of the payout. A subsidiary question iswhether the firm should embark on a campaign of corporate-image advertising, andchange its corporate name to reflect its new outlook. The case serves as an omnibusreview of the many practical aspects of the dividend and share buyback decisions,including (1) signaling effects, (2) clientele effects, and (3) the finance and investmentimplications of increasing dividend payouts and share repurchase decisions.Questions:How might Gainesboroâs various providers of capital, such as its stockholdersand creditors, react if Gainesboro declares a dividend in 2005?What are the arguments for and against the zero payout, 40% payout, andresidual payout policies?What should Ashley Swenson recommend to the board of directors withregard to a long-term dividend payout policy for Gainesboro Machine ToolsCorporation?
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