Case Notes/Answers
Gainesboro Machine Tools Corporation Robert Bruner
Sean Carr
Discussion Questions:
1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest
less, borrow more, or issue more stock. Which of those three elements is Gainesboro’s
management willing to vary, and which elements remain fixed as a matter of the
company’s policy?
2. What happens to Gainesboro’s financing need and unused debt capacity if:
a. no dividends are paid?
b. a 20% payout is pursued?
c. a 40% payout is pursued?
d. a residual payout policy is pursued?
Note that case Exhibit 8 presents an estimate of the amount of borrowing needed.
Assume that maximum debt capacity is, as a matter of policy, 40% of the book value of
equity.
3. How might Gainesboro’s various providers of capital, such as its stockholders and
creditors, react if Gainesboro declares a dividend in 2005? What are the arguments for
and against the zero payout, 40% payout, and residual payout policies? What should
Ashley Swenson recommend to the board of directors with regard to a long-term
dividend payout policy for Gainesboro Machine Tools Corporation?
4. How might various providers of capital, such as stockholders and creditors, react if
Gainesboro repurchased its shares? Should Gainesboro do so?
5. Should Swenson recommend the corporate-image advertising campaign and corporate
name change to the Gainesboro’s directors? Do the advertising and name change have
any bearing on the dividend policy or the stock repurchase policy that you propose?
, UV1384
Rev. Jun. 21, 2012
GAINESBORO MACHINE TOOLS CORPORATION
Teaching Note
Synopsis and Objectives
In mid-September 2005, Ashley Swenson, the chief financial Other cases in which
officer (CFO) of a large computer-aided design and computer-aided dividend policy is an
manufacturing (CAD/CAM) equipment manufacturer needed to decide important issue:
whether to pay out dividends to the firm’s shareholders, or to repurchase “Deutsche Brauerei,”
(UVA-F-1355)
stock. If Swenson chose to pay out dividends, she would have to also
decide upon the magnitude of the payout. A subsidiary question is whether the firm should
embark on a campaign of corporate-image advertising, and change its corporate name to reflect
its new outlook.
The case serves as an omnibus review of the many practical aspects of the dividend and
share buyback decisions, including (1) signaling effects; (2) clientele effects; and (3) the finance
and investment implications of increasing dividend payouts and share repurchase decisions. This
case can follow a treatment of the Miller-Modigliani1 dividend-irrelevance theorem and serves to
highlight practical considerations to consider when setting a firm’s dividend policy.
1
Merton Miller and Franco Modigliani, “Dividend Policy, Growth, and the Valuation of Shares,” Journal of
Business 34 (October 1961): 411–33.
, -2- UV1384
Suggested Questions for Advance Assignment to Students
The instructor could assign supplemental reading on dividend policy and share
repurchases. Especially recommended are the Asquith and Mullins article2 on equity signaling,
and articles by Stern Stewart on financial communication.3
1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest
less, borrow more, or issue more stock. Which of those three elements is Gainesboro’s
management willing to vary, and which elements remain fixed as a matter of the
company’s policy?
2. What happens to Gainesboro’s financing need and unused debt capacity if:
a. no dividends are paid?
b. a 20% payout is pursued?
c. a 40% payout is pursued?
d. a residual payout policy is pursued?
Note that case Exhibit 8 presents an estimate of the amount of borrowing needed.
Assume that maximum debt capacity is, as a matter of policy, 40% of the book value of
equity.
3. How might Gainesboro’s various providers of capital, such as its stockholders and
creditors, react if Gainesboro declares a dividend in 2005? What are the arguments for
and against the zero payout, 40% payout, and residual payout policies? What should
Ashley Swenson recommend to the board of directors with regard to a long-term
dividend payout policy for Gainesboro Machine Tools Corporation?
4. How might various providers of capital, such as stockholders and creditors, react if
Gainesboro repurchased its shares? Should Gainesboro do so?
5. Should Swenson recommend the corporate-image advertising campaign and corporate
name change to the Gainesboro’s directors? Do the advertising and name change have
any bearing on the dividend policy or the stock repurchase policy that you propose?
Supporting Excel Spreadsheet Files
For students: UVA-F-1489X
For instructors: UVA-F-1489TNX
2
Paul Asquith and David W. Mullins Jr., “Signaling with Dividends, Stock Repurchases, and Equity Issues,”
Financial Management (autumn 1986): 27–44.
3
“How to Communicate with an Efficient Market,” and “A Discussion of Corporate Financial
Communication,” Midland Corporate Finance Journal 2 (spring 1984).
Gainesboro Machine Tools Corporation Robert Bruner
Sean Carr
Discussion Questions:
1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest
less, borrow more, or issue more stock. Which of those three elements is Gainesboro’s
management willing to vary, and which elements remain fixed as a matter of the
company’s policy?
2. What happens to Gainesboro’s financing need and unused debt capacity if:
a. no dividends are paid?
b. a 20% payout is pursued?
c. a 40% payout is pursued?
d. a residual payout policy is pursued?
Note that case Exhibit 8 presents an estimate of the amount of borrowing needed.
Assume that maximum debt capacity is, as a matter of policy, 40% of the book value of
equity.
3. How might Gainesboro’s various providers of capital, such as its stockholders and
creditors, react if Gainesboro declares a dividend in 2005? What are the arguments for
and against the zero payout, 40% payout, and residual payout policies? What should
Ashley Swenson recommend to the board of directors with regard to a long-term
dividend payout policy for Gainesboro Machine Tools Corporation?
4. How might various providers of capital, such as stockholders and creditors, react if
Gainesboro repurchased its shares? Should Gainesboro do so?
5. Should Swenson recommend the corporate-image advertising campaign and corporate
name change to the Gainesboro’s directors? Do the advertising and name change have
any bearing on the dividend policy or the stock repurchase policy that you propose?
, UV1384
Rev. Jun. 21, 2012
GAINESBORO MACHINE TOOLS CORPORATION
Teaching Note
Synopsis and Objectives
In mid-September 2005, Ashley Swenson, the chief financial Other cases in which
officer (CFO) of a large computer-aided design and computer-aided dividend policy is an
manufacturing (CAD/CAM) equipment manufacturer needed to decide important issue:
whether to pay out dividends to the firm’s shareholders, or to repurchase “Deutsche Brauerei,”
(UVA-F-1355)
stock. If Swenson chose to pay out dividends, she would have to also
decide upon the magnitude of the payout. A subsidiary question is whether the firm should
embark on a campaign of corporate-image advertising, and change its corporate name to reflect
its new outlook.
The case serves as an omnibus review of the many practical aspects of the dividend and
share buyback decisions, including (1) signaling effects; (2) clientele effects; and (3) the finance
and investment implications of increasing dividend payouts and share repurchase decisions. This
case can follow a treatment of the Miller-Modigliani1 dividend-irrelevance theorem and serves to
highlight practical considerations to consider when setting a firm’s dividend policy.
1
Merton Miller and Franco Modigliani, “Dividend Policy, Growth, and the Valuation of Shares,” Journal of
Business 34 (October 1961): 411–33.
, -2- UV1384
Suggested Questions for Advance Assignment to Students
The instructor could assign supplemental reading on dividend policy and share
repurchases. Especially recommended are the Asquith and Mullins article2 on equity signaling,
and articles by Stern Stewart on financial communication.3
1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest
less, borrow more, or issue more stock. Which of those three elements is Gainesboro’s
management willing to vary, and which elements remain fixed as a matter of the
company’s policy?
2. What happens to Gainesboro’s financing need and unused debt capacity if:
a. no dividends are paid?
b. a 20% payout is pursued?
c. a 40% payout is pursued?
d. a residual payout policy is pursued?
Note that case Exhibit 8 presents an estimate of the amount of borrowing needed.
Assume that maximum debt capacity is, as a matter of policy, 40% of the book value of
equity.
3. How might Gainesboro’s various providers of capital, such as its stockholders and
creditors, react if Gainesboro declares a dividend in 2005? What are the arguments for
and against the zero payout, 40% payout, and residual payout policies? What should
Ashley Swenson recommend to the board of directors with regard to a long-term
dividend payout policy for Gainesboro Machine Tools Corporation?
4. How might various providers of capital, such as stockholders and creditors, react if
Gainesboro repurchased its shares? Should Gainesboro do so?
5. Should Swenson recommend the corporate-image advertising campaign and corporate
name change to the Gainesboro’s directors? Do the advertising and name change have
any bearing on the dividend policy or the stock repurchase policy that you propose?
Supporting Excel Spreadsheet Files
For students: UVA-F-1489X
For instructors: UVA-F-1489TNX
2
Paul Asquith and David W. Mullins Jr., “Signaling with Dividends, Stock Repurchases, and Equity Issues,”
Financial Management (autumn 1986): 27–44.
3
“How to Communicate with an Efficient Market,” and “A Discussion of Corporate Financial
Communication,” Midland Corporate Finance Journal 2 (spring 1984).
