Topics: Dividend, Dividend yield, Balance sheet Pages: 57 (5497 words) Published: November 3, 2014
Version 2.0

In mid-September 2005, Ashley Swenson, chief financial officer (CFO) of Gainesboro Machine Tools Corporation, paced the floor of her Minnesota office. She needed to submit a recommendation to Gainesboro’s board of directors regarding the company’s dividend policy, which had been the subject of an ongoing debate among the firm’s senior managers. Compounding her problem was the uncertainty surrounding the recent impact of Hurricane Katrina, which had caused untold destruction across the southeastern United States. In the weeks after the storm, the stock market had spiraled downward and, along with it, Gainesboro’s stock, which had fallen 18%, to $22.15. In response to the market shock, a spate of companies had announced plans to buy back stock. While some were motivated by a desire to signal confidence in their companies as well as in the U.S. financial markets, still others had opportunistic reasons. Now, Ashley Swenson’s dividenddecision problem was compounded by the dilemma of whether to use company funds to pay shareholder dividends or to buy back stock.

Background on the Dividend Question
After years of traditionally strong earnings and predictable dividend growth, Gainesboro had faltered in the past five years. In response, management implemented two extensive restructuring programs, both of which were accompanied by net losses. For three years in a row since 2000, dividends had exceeded earnings. Then, in 2003, dividends were decreased to a level below earnings. Despite extraordinary losses in 2004, the board of directors declared a small dividend. For the first two quarters of 2005, the board declared no dividend. But in a special letter to shareholders, the board committed itself to resuming payment of the dividend as soon as possible—ideally, sometime in 2005.

In a related matter, senior management considered embarking on a campaign of corporateimage advertising, together with changing the name of the corporation to “Gainesboro Advanced Systems International, Inc.” Management believed that the name change would help improve the investment community’s perception of the company.

This case was written by Robert F. Bruner and Sean Carr, and is dedicated to Professors Robert F. Vandell and Pearson Hunt, the authors of an antecedent case, long out of print, that provided the model for the economic problem in this case. “Gainesboro” is a fictional firm, though it draws on dilemmas of contemporary companies. The financial support of the Batten Institute is gratefully acknowledged. Copyright  2005 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊



Overall, management’s view was that Gainesboro was a resurgent company that demonstrated great potential for growth and profitability. The restructurings had revitalized the company’s operating divisions. In addition, the newly developed machine tools designed on state-ofthe-art computers showed signs of being well received in the market, and promised to render the competitors’ products obsolete. Many within the company viewed 2005 as the dawning of a new era, which, in spite of the company’s recent performance, would turn Gainesboro into a growth stock. The company had no Moody’s or Standard & Poor’s rating because it had no bonds outstanding, but Value Line rated it an “A” company.1

Out of this combination of a troubled past and a bright future arose Swenson’s dilemma. Did the market view Gainesboro as a company on the wane, a blue-chip stock, or a potential growth stock? How, if at all, could Gainesboro affect that...
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