Gainesboro Machine Tools Corporation - Essay

Topics: P/E ratio, Stock, Dividend Pages: 3 (954 words) Published: August 29, 2012
Executive Summary

Gainesboro Corporation was a company who designed and manufactured a number of machinery parts, including metal presses, dies, and molds. The company was found in 1923 in Concord, New Hampshire, by two mechanical engineers, James Gaines and David Scarboro. The two men had gone to school together and were disenchanted with their prospects as mechanics at a farm equipment manufacturer. In the 1940’s Gainesboro produced armored-vehicle and tank parts and miscellaneous equipment for the war effort. And then in the early 1980’s, they focused on manufacturing machinery parts, war equipment, and now entered new field of computer aided design and computer aided manufacturing (CAD/CAM).

Ashley Swenson, chief financial officer (CFO) in mid-September 2005 needed to submit recommendation to Gainesboro’s board of directors regarding the company’s dividend policy. The Gainesboro’s stock also fallen 18%to $22.15 due to post impact of the Hurricane Katrina. Now, Ashley Swenson’s dividend decision problem was compounded by the dilemma of whether to use company funds to pay shareholder dividends or to buy back stock.

>>Buy-back Stock
Stock Price per share = $22.15
Net income in year 2005 = $18,018,000
Number of shares = 18,600,000 shares (assumed number in year 2004 is
still the same with year 2005)
Earnings per share = $0.98
Price to earnings ratio ( P/E Ratio)=(Price per share)/EPS
P⁄E Ratio=22.15/0.98=22.6
Number of retired shares=(Net income)/(Price per share)
Number of retired shares=18,018,000/22,15=813,453.72≈813,454

Therefore, number of shares outstanding
=18,600,000-813,454=17,786,546 shares

Then we can calculate the new EPS after repurchase stock,
Earnings per Share (EPS) =(Net income)/(Number of shares)
EPS =$18,018,000/17,786,546=$1,013
Thus, the new market price is =EPS x PE Ratio=1.013 x 22.6=$22.89 It can be seen that by buying back the stock, the market price can increase for 3.34%....
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