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Stock and Dividend Payout

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Stock and Dividend Payout
ABMF5345 CASE STUDY IN FINANCE & INVESTMENT

CASE STUDY 3 (15%)

Case 3: Gainsboro Machine Tools Corp (GMTC)

Read the following about GMTC (GMTC). The questions posed to you are: -

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 the 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?

You are required to present your case analysis both orally (presentation) and in writing (report format).

Note: -

1. This is an individual assignment.
2. Be mindful of the danger of plagiarism. Referencing and bibliography are expected if any of your assignment is borrowed from any particular source. You

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    Gul and Kealey (1999). “Chaebol, Investment Opportunity Set and Corporate Debt and Dividend Policies of Korea Companies”. Review of Quantitative Finance and Accounting, Vol 13, 401-416. Healy & Palepu (1988), “Earnings Information Conveyed by Dividend Initiations and Omission.” Journal of Financial Economics, Vol. 21, 149-176 Jensen, M.C., and Meckling, W. H. (1986), “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics Vol.3, 305-360 La Porta, R. et al. (2000), “Agency Problems and Dividend Policies around the World,” Journal of Finance, Vol. 55 (1), 305-360 Lease, K. John, A.Kalay, U.Loewenstein and O.h. Sarig (2000), “ Dividend Policy: It impact on firm value.” Harvard Business School Press, Boston. Lintner, J (1956), “Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes”, America Economic Review, 46, 97-113 Miller, M.H., Modigliani, F. (1961) “Dividend Policy, Growth, and the Valuation of Shares”, Journal of Business, 34, 411-413 Minority Shareholder Watchdog Group (MSWG) and University Technologi MARA (UiTM) (2006), “Dividend Scanner 2005” Short, Helen, Hao Zhang and Kevin Keasey (2002), “The Link Between Dividend Policy and Institutional Ownership” Journal of Corporate Finance, Vol.8, 105-122 Smith, C.W. Jr. and Ross L. Watts (1992), “The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Financial Economies, Vol.32, 263-292 Stacescu, B (2006), “Dividend Policy in Switzerland”, Journal of Economic Literature, Nov, 1-44 Few S.L. et al. (2007). Dividend Policy: Evidence from Public Listed Companies in Malaysia. [Online]. Available: http://eprints.um.edu.my/984/1/Ling,FS_%26_Others.pdf. [2010, Nov 15] Baker H.K. and Powell G.H. (1999) Dividend policy issues in regulated and unregulated firms: a managerial perspective Volume: 25 Issue: 6 Bursa Malaysia: Annual Reports. [Online]. Available: http://www.klse.com.my/website/bm/listed_companies/company_announcements/ annual_reports/index.jsp. [2010, Nov 15]…

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