Overview of the problem:

The problem that Gainesboro is facing is that recently their share price has dropped by 18% and
the CEO of the Gainesboro Company is having trouble to find a way to fund companys dividend
payouts. For the past 5 years company is facing decline in its growth and earnings and in order to
solve this problem management has purposed two restructuring programs. The company has to
options to solve this crisis either they can buy back stocks which will increase share price and
investors confidence in the company or they can use company funds to pay dividends.
The main objective of this case is to evaluate and analyze different choices and decisions that
management can make in order to fund dividend payouts. We evaluate four options that are 0%,
20%, 40% dividend payout along with residual payout policy. We will also evaluate repurchasing
stock companys effort on Image advertising and rebranding.
Analysis:
Zero dividend payouts:
Gainesboro is a growing firm and it requires high reinvestment as compared to dividend payouts
in order to be successful. So if the management adopts this policy it will work in favor of the
company and also companys target debt to equity ratio will not be exceeded but shareholders
that depend on the steady dividend payouts will not receive the dividends which was promised to
them and they will not be content.
20% dividend payouts:
This policy coincides with the policy of Gainesboro giving dividends and also by adopting this
policy company will not have to change target debt to equity ratio. The problem with this policy
is that it will not send strong signal in market about the managements belief in the future
prospects the company.
40% dividend payouts:
The main advantages of this policy are that it is in line with industrial payouts for electrical and
industrial equipment manufacturer. Also it is consistent with companys policy of paying
dividends. The disadvantages of this policy are that it will violate companys target debt to equity
ratio and also large dividend payout will decline the growth prospect of the company which will
ultimately affect the future earnings and growth of the company.
Residual dividend payouts:
This policy dictates that the company should first invest capital funds in positive NPV projects
and remaining of the funds should be used to payout the dividends. If the company adopts this
policy they will not ensure the growth prospects of the company but this will also help them to
build the trust of the shareholders. Also this policy does not violate the target debt to equity ratio.
The main disadvantage of this approach is the uncertainty associated with dividend payouts.

Share Repurchase:
This option is suitable for short term shareholders who can take advantage of increased stock
price. Another advantage is that the tax deductions on capital gain are usually less than that on
dividends. The main disadvantage of this approach is that it will increase the debt to equity ratio
which will make debt more risky and also earning per share will decrease.
Image Advertising and Name Changing Campaign:
This campaign shows shareholders that the company is committed to future growth and global
expansion strategy thus it will have positive impact on the company. The change in name shows
that the company is changing its traditional machine tools production to CAD/CAM. The main
disadvantage is the large cost required for it approx. $10 million. Also there is no significant
evidence that shows correlation between rebranding and stock prices.
Recommendations:
After evaluating and analyzing all the options that are available to the company we recommend
that the company should adopt the policy of 20 % dividend payout. Not only it maintains
companys commitment to pay dividends but also it balances the needs of investors who want to
see both future growth and receive dividends.
The share repurchase is not the suitable option because it breaks the commitments with
shareholders and decrease the flexibility associated with debt.
The Gainesboro should carry on with the project of rebranding because it will reflect positive
image of the company as high technological and international company and also policy of 20 %
dividend payouts supports the new image of CAD/CAM focus.