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Gainesboro Machine Tools Corporation

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by

Yue Zhang

on 1 July 2015

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Transcript of Gainesboro Machine Tools Corporation

Background of the Company
Background of the Company
A Troubled Past
Image Advertising and Name Change
Dividend Payout Policy
A Bright Future
Founded 1923, Concord.

Early Years: Machinery parts,including metal press, dies, and molds.

1940s: Armored-vehicle, tank parts and miscellaneous equipment for the war.

Gainesboro Machine Tools Corporation



Gainesboro Adavanced Systems International, Inc.

1980s: Entered the computer-aided design (CAD) and computer-aided manufacturing (CAM) field.

1990s: Helped set the
standard for CAD/CAM.


Three choice:
Zero-dividend payout
40% dividend payout
Residual-dividend payout
Main goals:
15% annual growth rate
Debt/Equity < 40%



Advanced Corporate Finance
Team Members

Shumeng Xu
Jizheng Song
Yue Zhang
Yingyin Chen
Yujia Qiu

Gainesboro Machine Tools Corporation
1990s-2000s:Gainesboro fell behind some of its competition.

Revenues slipped from $911 million(1998) to $757 million(2004).

Dividends had exceeded earnings.



Restructurings has revitalized the company’s operating divisions.

Artificial Workforce is promising.


Corporate Goals
1. Average annual growth rate 15% (compound).
Three key points:
a) The mix of production shifts substantially.
b) International market expansion.
c) Expand thru joint ventures and acquisition of small software companies.
2. Keep debt/equity ratio below 40%.
3. Maximize growth in market share.

Three Approaches
Share Repurchase
Dividend Payout Policy
Image Advertising & Name Change

Share Repurchase
General reasons for share repurchasing
Adjust capital structure and maintain stable D/E ratio
Disburse free cash to shareholders
A substitute to dividends, which reduce the tax to shareholders because capital gain tax << income tax
Management believes that shares are undervalued
Show confidence to the market

Effects on EPS
Reasons to Reject Share Repurchase
Increase the D/E ratio, make debt more risky

Break the company’s promise of resuming payment of the dividend in 2005

No more cash for international expansion

EPS decreases after repurchasing due to the interest expense on debt

Scenario 1: Zero-dividend Payout
Financial model
Model assumptions
Pro-forma financial statements: I/S B/S

Model Assumptions: I/S

Model Assumptions: B/S

Pro-forma I/S

Pro-forma B/S

Zoom In
Zero-dividend Payout
Pro:
Within maximum debt capacity of 40%
Consistent with the goal of high growth

Con:
Break the promise of dividend-payout
Less tax shields

Scenario 2: 40% Dividend Payout
Financial model
Model assumptions
Pro-forma financial statements: I/S B/S

Model Assumptions: I/S

Model Assumptions: B/S

Pro-forma I/S

Pro-forma B/S

Zoom In
40% Dividend Payout
Pro
Signal strong future performance

Con
Exceed the 40% capacity
Limited resource for reinvestments

Scenario 3: Residual Dividend Payout
D/E Ratio: 0% VS 40% Dividend
A New Possibility: 20% Dividend Payout
Unpredictable

Conclusion
Recommendation:

Image Advertising and Name Change

20% dividend payout



Full transcript