Synopsis
In Mid- September 2005, Ashley Swenson CFO of the Gainesboro Mahinery, Gainesboro !rrently was fain" bad performane in last fi#e year, and the latest share prie was dropped d!e to the weather disaster o!r in reently$ F!rthermore, ompany earnin" was dropped to the deep from %&&' ()&%% million* to 200+ ()5 million*, and the earnin" per share was dropped as well$ .hose ne"ati#e dropped led to the delined of the di#idend, the di#idend in 200/ and 200+ was only "i#en )0$25 per share and whih was the lowest di#idends sine %&&%$ In 2002 and 200+, Gainesboro Mahinery was !nder"oin" two two restr! restr!t t!re !re pro"ra pro"rams ms,, one of the the pro"r pro"ram am was was inrea inreasin sin" " 1 1 b!d b!d"e "et$ t$ .h .h!s, !s, Gainesboro Gainesboro Mahinery was able to la!nhin" new artifiial artifiial wor3fore and it was e4peted to ontrib!te %5 ann!al "rowth rate$ !e to the bad pre#io!s performane and e4peted bri"ht f!t!re ret!rn in new artifiial wor3fore, Swenson was re6!ested to ome o!t di#idend proposal, and three options was s!""ested by her 7 8ero di#idend poliy, +0 di#idend pay-o!t, and resid!al di#idend pay-o!t$ $ If Swenson hose to pay o!t di#idends, she wo!ld ha#e to also deide !pon the ma"nit!de of the payo!t$ In order to "ain ba3 in#estor onfidene, she also onsidered rep!rhase the share to "ain the onfidene from the in#estor as well$ For ad#ertisin" impro#ement, one of the mana"ers Gainesboro s!""ested, name and ima"e of the ompany sho!ld han"e in order to han"e the pereption of the in#estor$ 9et, the ad#ertisin" pro"ram will ost %0 million to the ompany$ Learning Objective %$ .o identify and analyse analyse the reason reason that lead lead to ompany:s ompany:s di#idend deision deision ma3in" ma3in" 2$ .o define the problem problem of the the ompany ompany mar3etin" mar3etin" strate"ies strate"ies /$ .o analys analysee and re#iew re#iew of the many prati pratial al aspe aspets ts of the the di#ide di#idend nd and share b!yba3 deisions, inl!din" (%* si"nalin" effets, (2* lientele effets, and (/* the finane finane and in#estme in#estment nt implia impliation tionss of inreasi inreasin" n" di#idend di#idend payo!ts payo!ts and share share rep!rhase deisions$ Financial Concepts/Keywords Concepts/Keywords %$ .his ase ase an help help st!dent to follow follow a treatment treatment of the Miller-Mo Miller-Modi"liani di"liani di#idendirrele#ane theorem and ser#es to hi"hli"ht pratial onsiderations to onsider when settin" a firm:s di#idend poliy$ 2$ .o !lti#ate !lti#ate st!dent st!dent !sin" di#idend di#idend poliy poliy asepet, asepet, inl!din" inl!din" (%* si"nalin" si"nalin" effets effets,, (2* lientele effets, and (/* the finane and in#estment impliations to ma3e di#idend payo!ts and share rep!rhase deisions$ Question 1
Based on Swenson dividend policies proposal a) ero dividend payout! b) "# $ dividend payout o% a dividend o% around & #'(# a sare! c) *esidual+dividend payout! ow are te i,pact %or eac dividend policies proposal to -ainesboro. oes te eac o% dividend payout decision a%%ect te co,pany.
;ah di#idend payo!t was "i#in" positi#e and ne"ati#e infl!ene to the ompany$ a) 0ero dividend payout ositive+ Gainesboro was fain" bad performane in the last few years and the share prie
was fallen abo!t %' d!e to the disaster$ .here was less earnin" for ompany and ompany did not ha#e e4tra ash o!ld !se to distrib!te to the in#estor$ .he 8ero di#idend payo!t o!ld help the ompany to !tili8e the ash more on new tehnolo"y prod!t la!nhin" as ompany ash no need to prepare e4tra ash to distrib!te di#idend$ .he aeptane of the in#estor to 8ero di#idend payo!t was inreasin" sine %&&&$ Swenson was fo!nd o!t that there was researh st!dy showed that perenta"e of firms payin" ash di#idends had dropped from $5 (%&'* to 20$' (%&&&*$ .his mean that 8ero di#idend payo!t was hi"h possibilities aeptable in the !rrent mar3et$ 2egative + In#estor was seldom willin" to p!rhase ompany share whih "i#in" 8ero
di#idend payo!t$ Company may fae diffi!lty in see3in" in#estor from the mar3et$ In addition, most of se!rities analysts mi"ht possible to "i#e ne"ati#e omment for Gainesboro and indiretly affet in#estor in#estment deision$
anno!nement o!ld "i#e stron" si"nal to the shareholder and in#estor, and that a lar"er di#idend wo!ld s!""est that the ompany had on6!ered its problems and that its diretor were onfident of its f!t!re earnin"s$ =etween, this di#idend payo!t o!ld help the ompany "ain ba3 in#estor onfidene$ 2egative+ .he +0 di#idend payo!t re6!ired ompany to maintain e4ellent re#en!e for
the sale performane$ .he new prod!t only e4peted %5 "rowth and th!s it beome too optimisti if ompany wants to ha#e +0 di#idend sit!ation$ If the Gainesboro o!ld not
ahie#e the "ood performane, there were hi"h possibilities for Gainesboro to see3 for the borrowin" money to maintain this di#idend payo!t$ =etween, the di#idend payo!t was "i#in" press!re to most of the ompany, most of the listed ompany was seldom red!e the di#idend payo!t as they worried that shareholder and in#estor mi"ht lose onfident to their ompany$ .h!s, most of the firm will try to maintain the di#idend payo!t by borrowin" in order to maintain the positi#e feedba3 amon" the in#estor$ 9et, the debt of the ompany was !nnotieable inrease whih wo!ld brin" more serio!s finanial to the ompany$ c) *esidual+dividend payout ositive+ =ased on this di#idend payo!t, ompany was only pay the di#idend when there
was profit to the ompany or the di#idend will only distrib!te after the ompany o!ld ens!re all the pro>ets were pro#idin" positi#e net present #al!e$ =oth parties ompany and in#estor benefit o!ld be ens!red$ In addition, ompany o!ld ens!re the f!nd was !tili8ed f!lly in the ompany pro>et and only remain !n!sed f!nd was distrib!ted to the in#estor$ 2egative+ ?nder this poliy, the di#idend "i#en to the in#estor was floatin" e#ery year$ If
the ompany performane was less than e4peted, sometimes the di#idend will e#ent !t to 8ero, hi"h possibly ompany ability will be 6!estioned by the shareholder and there was ne"ati#e press!re imposin" to ompany share pries also$ Finane professor @ohn inter belie#ed that di#idend "i#en by the ompany wo!ld rise o#er time and rarely fall$ Question (3 4n your opinion! does te i,age advertising and na,e cange was really giving positive in%luence to te -ainesboro sare price. 4% you Swenson would you agree to do advertising progra,.
=ased on the ase, Gainesboro was ma3e a s!r#ey of reader of finanial ma"a8ines, most of the reader was low awareness of Gainesboro and its b!siness$ =etween, respondent who had hi"h awareness for the Gainesboro did not "i#in" positi#e o!tloo3 to the ompany "rowth$ Company o!ld base on the s!r#ey findin" to reate s!itable ad#ertisin" pro"ram to impro#e or enhane the ompany ima"e and #isibility amon" in#estor$ Bowe#er, it was ostly to the ompany$ In my opinion, the ad#ertisin" pro"ram o!ld only impro#e the ompany ima"e b!t diffi!lt to infl!ene the ompany share prie$ =etween, the ad#ertisin" was ost abo!t ) %0 million and no one o!ld ens!re how stron" of the infl!ene o!ld brin" by this pro"ram to the ompany$ =ased on the ase, Gainesboro was find ons!ltant re"ardin" this
pro"ram b!t no empirial e#idene o!ld pro#ide$ .h!s, the impat of the pro"ram mi"ht be not e6!al to the )%0 million and Gainesboro o!ld !se this amo!nt to enhane their ompany prod!t rather than in#est in this pro"ram whih o!ld not pro#ide onfirm ret!rn to the ompany$ Question 5 6)7at was te i,pact i% co,pany decided to repurcase stoc8 and give up dividend payout. B) Sould -ainesboro us its %unds to repurcase stoc8 or paying out a dividend to te sareolder to enance te con%idence o% te investor. Or sould -ainesboro to ta8e bot decisions into consideration. 6) 4% co,pany only wants to repurcase stoc8 and give up dividend payout. ositive+ ompany n!mber of o!tstandin" shares red!es and therefore in#estor earnin"
per share wo!ld inrease$ .h!s, Gainesboro able to b!ild !p onfidene of in#estor and the share prie of the ompany o!ld temporary p!sh !p$ 2egative- Company needs to find e4tra ash to b!y ba3 the share and ne"ati#e impat
was brin"in" to the ompany ash flow$ .he less di#idend res!lted ne"ati#e press!re imposed to the ompany:s ima"e and its share prie$ =* In order to restore onfidene of in#estor, Gainesboro ta3e both deision into onsideration$ .hey sho!ld "i#e di#idend b!t m!st be realisti and ompany o!ld deide to rep!rhase the o!tstandin" to inrease in#estor earnin" per share$ As mentioned in the ases, the e4peted ann!al "rowth rate at %5, Gainesboro o!ld base on this "rowth rate to pro#ided 20 di#idend payo!t$ Key assu,ption
9:pected result
If based 20 di#idend payo!t, ompany will "enerate positi#e ash flow after 200& Company ash flow will be t!rn to positi#e in 200& with )%%$% million$ For this positi#e ash flow o!ld help them more opport!nity to do rep!rhases and inrease in#estor onfidene$ .he debt to e6!ity ratio will red!e to the %0$' in 20%%$ Company was e4peted less depend on debt to finanes its debt$
