Please review the case and answer question 1 and question 5 base on the case below.
For Question 1, our team decided to borrow more for the company.
About 1-2 pages for each cases
Gainesboro Machine Tools Corporation
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 Gainesboroâ€™s management willing to vary, and which elements remain fixed as a matter of the companyâ€™s policy?
- What happens to Gainesboroâ€™s financing need and unused debt capacity if:
- no dividends are paid?
- a 20% payout is pursued?
- a 40% payout is pursued?
- 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.
- How might Gainesboroâ€™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?
- How might various providers of capital, such as stockholders and creditors, react if Gainesboro repurchased its shares? Should Gainesboro do so?
- Should Swenson recommend the corporate-image advertising campaign and corporate name change to the Gainesboroâ€™s directors? Do the advertising and name change have any bearing on the dividend policy or the stock repurchase policy that you propose.