of stock can be viewed in each of the following way: investment‚ financing‚ shareholder distribution and control issue. Repurchase of stock can be a way to use firm’s excess debt capacity. By doing so‚ firm can lower the cost of equity financing. If debt financing is more flexible and cheap‚ replace equity financing with debt financing is a good way to lower the weighted cost of capital. In this sense‚ such action is a financing issue because it controls the cost of financing. On the other hand‚
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Summary of Facts September of 2005 Ashley Swenson is faced with preparing a recommendation on the restructuring of the dividend payout policy for Gainesboro Machine Tools Corporation. In the past few years the company has experienced a decrease in sales due to increased competition. With the recent development of the Artificial Workforce‚ the company is looking at making a positive turnaround. With the soon to come global expansion and the forecasted growth in sales brought by new innovations of
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GAINESBORO MACHINE TOOLS CORPORATION Overview In mid September 2005‚ Ashley Swenson‚ the chief financial officer of this large CAD/CAM equipment manufacturer must decide whether to pay out dividends to the firm¡¦s shareholders or repurchase stock. If Swenson chooses to pay out dividends‚ she must also decide on the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising and change its corporate name to reflect its new outlook
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increase) * Debt covenant reduce agency costs = good sign * Share price increase so external financing by share issues more effective. Disadvantage : * 40% payout ratio will increase the cost of debt and put at risk it s investment opportunities * According to Asquith and Mullins (1986‚36) dividend signalling is more effective for lower risk firms‚ which Gainesboro is not. * Raise the capital to pay dividend by borrowing more will lead to an increase of debt to equity ratio
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INDORE Finance 2 Case Analysis Gainesboro Machine Tool Corporation Course Instructor: Prof A Kanagraj Submitted By: Amol Vyawahare Roll Number: 2008PGP021B Gainesboro Machine Tool Corporation Background Reading: Once a company makes a profit‚ they must decide on what to do with those profits. They could continue to retain the profits within the company‚ or they could pay out the profits to the owners of the firm in the form of dividends. Once the company decides on whether to pay dividends
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How might various providers of capital (shareholders and creditors) react if Gainesboro repurchased its shares? Should Gainesboro do so? Repurchasing shares or share buyback: – Open market repurchases (buy over time as other investors) – Tender offer (buy shares at a precise date) – Targeted repurchase (buy from major shareholder There are ways for shareholders to receive cash without being paid dividends. A firm can buy back some of its shares with the advantage being that most investors
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Gainesboro Machine Tools Corporation Teaching Note Synopsis and Objectives In mid September 2005‚ Ashley Swenson‚ the chief financial officer (CFO) of a large computer-aided design and computer-aided manufacturing (CAD/CAM) equipment manufacturer needed to decide whether to pay out dividends to the firm’s shareholders‚ or to repurchase stock. If Swenson chose to pay out dividends‚ she would have to also decide upon the magnitude of the payout. A subsidiary question is whether the firm should
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Gainesboro Machine Tools Corporation Executive Summary Company: Gainesboro Corporation is a company that began in 1923 as a manufacturer of metal machinery parts which was in high demand during the Second World War. Since then‚ Gainesboro has changed with the times‚ entering into the machine tool industry in 1975 and most recently has transitioned into computer-aided design and computer-aided manufacturing (CAD/CAM) equipment manufacturer. Recently‚ two events have events have taken place
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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
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Production Capacity It is highly imperative that management must formulate a strategic plan for operations before any production is carried out. This is basically important in avoiding possible hindrances and excess in capacity. Under capacity may force the firm to cancel production schedules or excess can be fatal due to a broadened fixed cost. Both really would be a financial burden to the firm. Some procedural strategy can be adopted to minimize ill effects of capacity-related problems
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