Synopsis

In Mid- September 2005, Ashley Swenson CFO of the Gainesboro Machinery,

Gainesboro currently was facing bad performance in last five year, and the latest share
price was dropped due to the weather disaster occur in recently. Furthermore, company
earning was dropped to the deep from 1998 ($911 million) to 2004 ($756 million), and the
earning per share was dropped as well. Those negative dropped led to the declined of the
dividend, the dividend in 2003 and 2004 was only given $0.25 per share and which was the
lowest dividends since 1991. In 2002 and 2004, Gainesboro Machinery was undergoing
two restructure programs, one of the program was increasing R&D budget. Thus,
Gainesboro Machinery was able to launching new artificial workforce and it was expected
to contribute 15% annual growth rate.
Due to the bad previous performance and expected bright future return in new
artificial workforce, Swenson was requested to come out dividend proposal, and three
options was suggested by her : zero dividend policy, 40% dividend pay-out, and residual
dividend pay-out. . If Swenson chose to pay out dividends, she would have to also decide
upon the magnitude of the payout. In order to gain back investor confidence, she also
considered repurchase the share to gain the confidence from the investor as well. For
advertising improvement, one of the managers Gainesboro suggested, name and image of
the company should change in order to change the perception of the investor. Yet, the
advertising program will cost 10 million to the company.
Learning Objective
1. To identify and analyse the reason that lead to companys dividend decision making
2. To define the problem of the company marketing strategies
3. To analyse and 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.
Financial Concepts/Keywords
1. This case can help student to follow a treatment of the Miller-Modigliani dividendirrelevance theorem and serves to highlight practical considerations to consider
when setting a firms dividend policy.
2. To cultivate student using dividend policy asepect, including (1) signaling effects,
(2) clientele effects, and (3) the finance and investment implications to make
dividend payouts and share repurchase decisions.
Question 1

Based on Swenson dividend policies proposal a) zero dividend payout, b) 40 %

dividend payout of a dividend of around $ 0.20 a share, c) Residual-dividend payout,
how are the impact for each dividend policies proposal to Gainesboro? Does the each
of dividend payout decision affect the company?
Each dividend payout was giving positive and negative influence to the company.
a) Zero dividend payout
Positive- Gainesboro was facing bad performance in the last few years and the share price
was fallen about 18 % due to the disaster. There was less earning for company and
company did not have extra cash could use to distribute to the investor. The zero dividend
payout could help the company to utilize the cash more on new technology product
launching as company cash no need to prepare extra cash to distribute dividend.
The acceptance of the investor to zero dividend payout was increasing since 1999.
Swenson was found out that there was research study showed that percentage of firms
paying cash dividends had dropped from 66.5% (1978) to 20.8% (1999). This mean that
zero dividend payout was high possibilities acceptable in the current market.
Negative - Investor was seldom willing to purchase company share which giving zero
dividend payout. Company may face difficulty in seeking investor from the market. In
addition, most of securities analysts might possible to give negative comment for
Gainesboro and indirectly affect investor investment decision. Perhaps most of them will
some more emphasizes Gainesboros recent performance problem if company practice zero
dividend payout. Some researcher argued that (Merton Miller and Franco Modigliani)
dividend cut to zero, possibly imposing negative pressure on the firm share price. Between,
investor will think that company is fail in their commitment.
b) 40 % dividend payout of a dividend of around $ 0.20 a share
Positive- Restore the dividend of Gainesboro to the highest since 2001. This
announcement could give strong signal to the shareholder and investor, and that a larger
dividend would suggest that the company had conquered its problems and that its director
were confident of its future earnings. Between, this dividend payout could help the
company gain back investor confidence.
Negative- The 40% dividend payout required company to maintain excellent revenue for
the sale performance. The new product only expected 15% growth and thus it become too
optimistic if company wants to have 40% dividend situation. If the Gainesboro could not

achieve the good performance, there were high possibilities for Gainesboro to seek for the
borrowing money to maintain this dividend payout. Between, the dividend payout was
giving pressure to most of the company, most of the listed company was seldom reduce the
dividend payout as they worried that shareholder and investor might lose confident to their
company. Thus, most of the firm will try to maintain the dividend payout by borrowing in
order to maintain the positive feedback among the investor. Yet, the debt of the company
was unnoticeable increase which would bring more serious financial to the company.
c) Residual-dividend payout
Positive- Based on this dividend payout, company was only pay the dividend when there
was profit to the company or the dividend will only distribute after the company could
ensure all the projects were providing positive net present value. Both parties company and
investor benefit could be ensured. In addition, company could ensure the fund was utilized
fully in the company project and only remain unused fund was distributed to the investor.
Negative- Under this policy, the dividend given to the investor was floating every year. If
the company performance was less than expected, sometimes the dividend will event cut to
zero, high possibly company ability will be questioned by the shareholder and there was
negative pressure imposing to company share prices also. Finance professor John Linter
believed that dividend given by the company would rise over time and rarely fall.
Question 2:
In your opinion, does the image advertising and name change was really giving
positive influence to the Gainesboro share price? If you Swenson would you agree to
do advertising program?
Based on the case, Gainesboro was make a survey of reader of financial magazines, most
of the reader was low awareness of Gainesboro and its business. Between, respondent who
had high awareness for the Gainesboro did not giving positive outlook to the company
growth. Company could base on the survey finding to create suitable advertising program
to improve or enhance the company image and visibility among investor. However, it was
costly to the company.
In my opinion, the advertising program could only improve the company image but
difficult to influence the company share price. Between, the advertising was cost about $
10 million and no one could ensure how strong of the influence could bring by this
program to the company. Based on the case, Gainesboro was find consultant regarding this

program but no empirical evidence could provide. Thus, the impact of the program might
be not equal to the $10 million and Gainesboro could use this amount to enhance their
company product rather than invest in this program which could not provide confirm return
to the company.
Question 3
A)What was the impact if company decided to repurchase stock and give up dividend
payout? B) Should Gainesboro us its funds to repurchase stock or paying out a
dividend to the shareholder to enhance the confidence of the investor? Or should
Gainesboro to take both decisions into consideration?
A) If company only wants to repurchase stock and give up dividend payout?
Positive- company number of outstanding shares reduces and therefore investor earning
per share would increase. Thus, Gainesboro able to build up confidence of investor and the
share price of the company could temporary push up.
Negative- Company needs to find extra cash to buy back the share and negative impact
was bringing to the company cash flow. The less dividend resulted negative pressure
imposed to the companys image and its share price.
B) In order to restore confidence of investor, Gainesboro take both decision into
consideration. They should give dividend but must be realistic and company could decide
to repurchase the outstanding to increase investor earning per share. As mentioned in the
cases, the expected annual growth rate at 15%, Gainesboro could base on this growth rate
to provided 20% dividend payout.
Key assumption

Expected result

If based 20 % dividend payout, company will generate positive cash flow after 2009
Company cash flow will be turn to positive in 2009 with $11.1 million. For this positive
cash flow could help them more opportunity to do repurchases and increase investor
confidence. The debt to equity ratio will reduce to the 10.8% in 2011. Company was
expected less depend on debt to finances its debt.