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NORTHBORO MACHINE TOOLS CORPORATION

Does it matter whether we pay a high or low dividendor no dividend at all? To


whom? And why? Our board is hearing some conflicting claims about dividend
policy. I need to resolve this and recommend a dividend decision to the board for the
third quarter of 1992.

With these words, Christine Olsen, the chief financial officer of Northboro Machine Tools
Corporation, explained that she had become the judge in a debate over dividend policy within the
company. After years of traditionally strong earnings and predictable dividend growth, the company
faltered in the late 1980s. In response, management implemented two extensive restructuring
programs, both of which were accompanied by net losses. For three years in a row, dividends
exceeded earnings. Then, in 1990, dividends decreased to a level below earnings. Despite
extraordinary losses in 1991, the board of directors declared a small dividend. For the first two
quarters of 1992, the board declared no dividend. But in a special letter to shareholders the board
committed itself to resuming the dividend as early as possibleideally, in 1992. In the summer of
1992, Olsen had to recommend to the board a dividend policy for implementation in the quarter
ending September 30.
As a related matter, senior management was considering embarking on a campaign of
corporate image advertising, along with changing the name of the corporation to Northboro
Advanced Systems International, Inc. Management felt that this would help improve the perception
of the company in the investment community. Olsen needed to recommend action to the board on
this proposal.
Overall, managements view was that Northboro was a resurgent company that demonstrated
great potential for growth and profitability. The restructurings had revitalized the companys
operating divisions, and a new product promised to make its predecessors and competitors
products obsolete. Many within the company viewed 1992 as the dawning of a new era that, in spite
of the companys recent performance, would turn Northboro into a growth stock. The company had

This case is dedicated to Professors Robert F. Vandell and Pearson Hunt, the authors of an antecedent case, long out of
print, that provided the model of the economic problem for this case. Northboro is a fictional firm, though it draws on
facts of contemporary companies. It was written by Casey S. Opitz under the supervision of Robert F. Bruner as a basis
for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright
1997 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies,
send an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying,
recording, or otherwisewithout the permission of the Darden School Foundation. Rev. 12/97.

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no Moodys or Standard & Poors rating because it had no bonds outstanding, but Value Line rated it
an A company.1
Out of this combination of a troubled past and a bright future arose Olsens dilemma. Did the
market view Northboro as a loser, as a blue chip stock, or as a potential growth stock? How, if at all,
could Northboro affect that perception? Would a change of name help frame investors views of the
firm? Did the companys investors expect capital growth or steady dividends? And if those questions
could be answered, what were the implications for Northboros future dividend policy?

The Company
Northboro Corporation was founded in 1923 in Concord, New Hampshire, by two
mechanical engineers, James North and David Peterboro, who had gone to school together and were
disenchanted with their positions and prospects as mechanics at a farm equipment manufacturer.
In its early years, Northboro designed and manufactured a number of machinery parts,
including metal presses, dies, and molds. In the 1940s, the companys large manufacturing plant
produced tank and armored-vehicle parts and miscellaneous equipment for the war effort, including
riveters and welders. After the war, the company concentrated on the production of industrial presses
and molds, for plastics as well as metals. By 1975, the company had developed a reputation as an
innovative producer of industrial machinery and machine tools.
In the late 1970s, Northboro entered the new field of computer-aided design and computeraided manufacturing (CAD/CAM). Working with a small software company, it developed a line of
presses that would manufacture metal parts by responding to computer commands. Northboro
merged the software company into its operations and, over the next several years, perfected the
CAM equipment. At the same time, it developed a superior line of CAD software and equipment
that would allow an engineer to design a part to exacting specifications on a computer. The design
could then be entered into the companys CAM equipment, and the parts would be manufactured
without the use of blueprints or human interference. By year-end 1991, CAD/CAM equipment and
software were responsible for about 45% of sales; presses, dies, and molds for 40%; and
miscellaneous machine tools for 15%.
Most press and mold companies were small, local or regional firms with limited clientele.
For this reason, Northboro stood out as a true industry leader. Within the CAD/CAM industry,
however, a number of larger firms, including General Electric, Hewlett-Packard, and Digital
Equipment, competed for dominance of the growing market.

Value Lines financial-strength ratings, from A++ to C, were a measure of a companys ability to withstand adverse
business conditions and were based on leverage, liquidity, business risk, company size, and stock-price variability, as
well as analysts judgments.

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Throughout the 1980s Northboro helped set the standard for CAD/CAM, but the aggressive
entry of large foreign firms into CAD/CAM and the rise of the dollar dampened sales. Moreover,
Northboro fell behind some of its competition in the development of user-friendly software and the
integration of design and manufacturing. As a result, revenues declined from a high of $607 million
in 1985 to $504 million in 1991.
To combat the decline in revenues and improve weak profit margins, Northboro took a twopronged approach. First, it devoted a greater share of its research and development budget to
CAD/CAM in an effort to re-establish leadership in the field. Second, the company underwent two
massive restructurings. In 1989, it sold two unprofitable lines of business with revenues of $31
million, sold two plants, eliminated five leased facilities, and reduced personnel. Restructuring costs
totaled $44 million. Then, in 1991, the company began a second round of restructuring by altering its
manufacturing strategy, refocusing its sales and marketing approach, and adopting administrative
procedures that allowed for a further reduction in staff and facilities. The total cost of the operational
restructuring in 1991 was $60 million.
The companys latest income statements and balance sheets are provided in Exhibits 1 and
2. Although the two restructurings produced losses totaling $135 million in 1989 and 1991, by 1992
the restructurings and the increased emphasis on CAD/CAM research appeared to have launched a
turnaround. Not only was the company leaner, but also the CAD/CAM research led to the
development of a system that Northboro management believed would redefine the industry. Known
as the Artificial Workforce, the system was an array of advanced control hardware, software, and
applications that could distribute information throughout a plant.
Essentially, the Artificial Workforce allowed an engineer to design a part on the CAD and
input the data into a CAM that could control the mixing of chemicals or the molding of parts from
any number of different materials on different machines. The system could also assemble and can,
box, or shrinkwrap the finished product. Thus, no matter how intricate, a product could be designed,
manufactured, and packaged solely by computer.
Northboro developed applications of the product for the plastics, food-processing, and pulp
and paper industries in 1991 and by the next year was developing applications for the oil- and gasrefining and chemicals industries.
By October 1991, when the first Artificial Workforce was shipped, Northboro had orders
totaling $75 million; by year-end, the backlog totaled $100 million. The future for the product
looked bright. Several securities analysts were optimistic about the products impact on the
company. The following comments paraphrase their thoughts:
Artificial Workforce products have compelling advantages over competing entries
and will enable Northboro to increase its share of a market that, ignoring periodic
growth spurts, will expand at a real annual rate of about 5% over the next several
years

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The company is producing the Artificial Workforce in a new automated facility


which, when in full swing, will help restore margins to levels not seen for years

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The important question now is how quickly Northboro will be able to ship in
volume. Manufacturing foul-ups and missing components have delayed production
growth through May 1992, about six months beyond the original target date. And
startup costs, which were a significant factor in last years deficits, have continued to
penalize earnings. Our estimates assume that production will proceed smoothly from
now on and that it will approach the optimum level by years end
Northboro management expected domestic revenues from the Artificial Workforce series to
total $90 million in 1992 and $150 million in 1993. Thereafter, growth in sales would depend on the
development of more system applications and the creation of system improvements and add-on
features. International sales through Northboros existing offices in Frankfurt, London, Milan, and
Paris, and new offices in Hong Kong, Seoul, Manila, and Tokyo were expected to provide additional
revenues of $150 million as early as 1994. Currently, international sales accounted for about 15% of
total corporate revenues.
Two factors that could affect sales were of some concern to Northboro. First, although the
company had successfully patented several of the processes used by the Artificial Workforce system,
management had received hints through industry observers that two strong competitors were
developing comparable products and would probably introduce them within the next 12 months.
Second, sales of molds, presses, machine tools, and CAD/CAM equipment and software were highly
cyclical, and predictions about the strength of the U.S. economy were mixed. The economy had been
weak for almost two years. As shown in Exhibit 3, the projected indicators were sending mixed
messages. Domestic real GNP was expected to grow at 3.2% and 2.8% in the next two years,
respectively. On the other hand, capital spending on industrial durable equipment was expected to
increase dramatically over the next two years, at 7.5% and 8.7%, respectively.

Corporate Goals
A number of corporate objectives grew out of the restructurings and recent technological
advances. First and foremost, management wanted and expected the firm to grow at an average
annual compound rate of 15%. A great deal of corporate planning was devoted to that goal over the
preceding three years and, indeed, second-quarter financial data suggested that Northboro would
achieve revenues of about $580 million in 1992, as shown in Exhibit 1. If Northboro achieved a
15% compound rate of growth through 1998, the company would reach $1.3 billion in sales and
$107 million in net income.
In order to achieve this growth goal, Northboro management proposed a strategy relying on
three key points. First, the mix of production would shift substantially. CAD/CAM and peripheral
products on the cutting edge of industry technology would account for three-quarters of sales; the
companys traditional presses and molds would account for the remainder. Second, the company
would expand aggressively internationally, where it would hope to obtain half of its sales and profits
by 1998. This expansion would be achieved through opening new field sales offices around the

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world. At present, Northboro was represented only in Europe. Third, the company would expand
through joint ventures and acquisitions of small software companies, which would provide half of
the new products through 1998; internal research would provide the other half.
From its beginning Northboro had an aversion to debt. Management believed that a small
amount of debt, primarily to meet working-capital needs, had its place, but that anything beyond a
40% debt to equity ratio was, in the oft-quoted words of the founder David Peterboro, unthinkable,
indicative of sloppy management, and flirting with trouble. Senior management was aware that
equity was typically more costly than debt but took great satisfaction in the company doing it on its
own. Northboros highest debt to capital ratio in the past 25 years28%occurred in 1991, and
was still the subject of conversations among senior managers.
Although 11 members of the North and Peterboro families owned 30% of the companys
stock and three were on the board of directors, management placed the interests of the public
shareholders first. (Shareholder data are provided in Exhibit 4.) Stephen North, chairman of the
board and grandson of the cofounder, sought to maximize the growth in the market value of the
companys stock over time.
At the age of 61, Steven North was actively involved in all aspects of the companys growth
and future. He was conversant with a range of technical details of Northboros products and was
especially interested in finding ways to improve the companys domestic market share. His
retirement was no more than four years in the future, and he wanted to leave a legacy of corporate
financial strength and technological achievement. The Artificial Workforce, a project he took under
his wing four years earlier, was beginning to bear fruit. He now wanted to ensure that the firm would
also soon be able to pay a dividend.
He took particular pride in selecting and developing young managers with promise. Olsen
had a bachelors degree in electrical engineering and was a systems analyst for Motorola before
graduate school. She was hired in 1982 out of a well-known MBA program. By 1991 she had risen
to the position of chief financial officer.

Dividend Policy
Northboros dividend and stock price histories are presented in Exhibit 5. Prior to 1986, both
earnings and dividends per share had grown at a relatively steady pace, but the recession in the early
1980s and the restructurings took their toll on earnings. As a consequence, dividends were pared
back in 1990 to $0.25 per sharethe lowest dividend since 1977. In 1991, the board of directors
declared a payout of $0.25 per share despite reporting the largest per-share earnings loss in the
firms history, and in effect, borrowing to pay the dividend. In the first two quarters of 1992, the
directors had not declared a dividend. In a special letter to shareholders, however, the directors
declared their intention to continue the annual payout later in 1992.

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In August 1992, Olsen contemplated three possible dividend policies to recommend:

Zero dividend payout. This option could be justified in light of the firms strategic reposition
to advanced technologies and CAD/CAM, and reflected the huge cash requirements of that
move. The proponents of this policy argued that it would signal that the firm belonged in a
class of high-growth and high-technology firms. Some securities analysts wondered whether
the market still considered Northboro as a traditional electrical equipment manufacturer or as
a more technologically advanced CAD/CAM company. The latter category would imply that
the market was expecting strong capital appreciation, but perhaps little in the way of
dividends. Others cited Northboros recent performance problems. One questioned the
wisdom of ignoring the financial statements in favor of acting like a blue chip. Was a high
dividend in the long-term interests of the company and its stockholders, or would the
strategy backfire and make investors skittish?

40% dividend payout, or a dividend of $0.20 per share. This would restore the firm to an
implied annual dividend payment of $0.80 per share, the highest since 1988. Proponents of
this policy argued that there was undoubtedly some anticipation of such an announcement in
the current stock price of $32 per share, and that this was justified by expected increases in
orders and sales. Northboros investment banker suggested that the market might be
expecting a strong dividend in order to bring the payout back in line with the 52% average
within the electrical industrial equipment industry and with the 68% average in the machine
tool industry. Still others believed that it was important to send a strong signal to
shareholders, and that a large dividend (on the order of a 40% payout) would suggest that the
company had conquered its problems and that its directors were confident of future earnings.
Supporters of this view argued that borrowing to pay dividends was not inconsistent with the
behavior of most firms. Finally, some older members of management opined that a growth
rate in the range of 10% to 20% should accompany a payout of 30% to 50%.

Residual dividend payout policy. A small segment on the finance staff argued that Northboro
should pay dividends only after funding all projects offering positive net present values
(NPVs). Their view was that investors were paying managers to deploy their funds at returns
better than they could achieve otherwise, and that, by definition, such investments would
yield positive NPVs. By deploying funds into these projects and otherwise returning unused
funds to investors in the form of dividends, the firm would build trust with investors and be
rewarded with higher valuation multiples. General Motors was the preeminent example of a
firm that had followed such a policy, though few large publicly held firms followed their
example.
Another argument in support of this policy was that dividend policy was irrelevant in a
growing firm: any dividend paid today would be offset by dilution at some future date by the
issue of shares necessary to make up for the dividend. This argument reflected the theory of
dividends in a perfect market advanced by two finance professors, Merton Miller and Franco
Modigliani.2 The main disadvantage of this policy to Christine Olsen was that dividend

M.H. Miller and F. Modigliani, Dividend Policy, Growth and the Valuation of Shares, Journal of Business, 34

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payments would be unpredictable. In some years, dividends could be cuteven to zero


possibly imposing negative pressure on the firms share price. Olsen was all too aware of
Northboros own share price collapse, following its dividend cut. She recalled a study by
another finance professor, John Lintner,3 which found that firms dividend payments tended
to be sticky upwardthat is, dividends would rise over time and rarely fall, and that
mature slower-growth firms paid higher dividends, while high-growth firms paid lower
dividends.
In response to this internal debate, Olsens staff pulled together Exhibits 6 and 7, which
present comparative information on companies in three industriesCAD/CAM, machine tools, and
electrical industrial equipmentand on a general sample of high- and low-payout companies. To
test the feasibility of a 40% dividend payout rate, Olsen developed the projected sources and uses of
cash provided in Exhibit 8. She took the boldest approach by assuming that the company would
grow at a 15% compound rate, that operating margins would improve over the next few years to
historical levels, and that the firm would pay a dividend of 40% of earnings every year. In particular,
the forecast assumed that the firms net margin would hover between 5.6% and 6.0% over the next
six years and then increase to 7.95% in 1998. The firms operating executives believed that this
increase in profitability was consistent with economies of scale to be achieved upon the attainment
of higher operating output of the Artificial Workforce.

Image Advertising and Name Change


As part of a general review of the firms standing in the financial markets, Northboros
director of Investor Relations, Alice Dent, had concluded that investors misperceived the firms
prospects and that the firms current name was more consistent with the firms historical product
mix and markets than with those expected in the future. Dent commissioned surveys of readers of
financial magazines, which revealed a relatively low awareness of Northboro or its business. Surveys
of stockbrokers revealed higher awareness of the firm, but a low or mediocre outlook on Northboros
likely returns to shareholders and growth prospects. Dent retained a consulting firm that
recommended a program of corporate image advertising targeted toward opinion-leading
institutional investors and individual investors. The objective was to enhance the awareness and
image of Northboro. Through focus groups, the consultants identified a name that appeared to
suggest the firms promising strategy, Northboro Advanced Systems International, Inc. Dent
estimated that the image advertising campaign and name change would cost about $10 million.
Stephen North, the firms board chair, was mildly skeptical. He said, Do you mean to raise
our stock price by marketing our shares? This is a novel approach. Can you sell claims on a
company the way Procter & Gamble markets soap? The consultants could give no empirical

(October 1961): 411433.


3
J. Lintner, Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes, American
Economic Review 46 (May 1956): 97113.

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evidence that stock prices responded favorably to corporate image campaigns or name changes,
though they did offer some favorable anecdotes.

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Conclusion
Christine Olsen was caught in a difficult position. Members of the board and management
disagreed on the very nature of Northboros future. Some managers saw the company as entering a
new stage of rapid growth and thought that a large (or in the minds of some, any) dividend would be
inappropriate. Others believed that it was important to make a firm gesture to the public that
management believed Northboro had turned the corner and was about to return to the levels of
growth and profitability seen in the 1970s. This action could only be accomplished through a
dividend. As she wrestled with the different points of view, she wondered whether management
might be representative of the companys shareholders. Did the majority of public shareholders own
stock for the same reason, or were their reasons just as diverse as those of management?

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Exhibit 1
NORTHBORO MACHINE TOOLS CORPORATION
Consolidated Income Statements
(dollars in thousands, except per-share data)

Net sales
Cost of sales

For the Years Ended December 31


Projected
1989
1990
1991
1992
$572,175
$543,986 $504,425 $580,000
360,498
334,305
332,586
366,500

Gross profit
Research and development
Selling, general, and administrative
Restructuring costs
Operating profit (loss)
Other income (expense)

211,677
51,785
153,314
43,632
(37,054)
(3,000)

209,681
47,030
149,089
0
13,562
710

171,839
50,278
154,005
59,607
(92,051)
(2,305)

213,500
51,500
141,000
0
21,000
(2,800)

Income (loss) before taxes


Income taxes (benefit)

(40,054)
827

14,272
5,610

(94,356)
(500)

18,200
6,188

$(40,881)

$ 8,662

$(93,856)

$ 12,012

Net income (loss)

Earnings (loss) per share


Dividends per share

$(3.31)
$0.78

$0.70
$0.25

This assumes a $0.20 dividend per share for the last two quarters of 1992.

$(7.62)
$0.25

$0.97
$0.401

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Exhibit 2
NORTHBORO MACHINE TOOLS CORPORATION
Consolidated Balance Sheets
(dollars in thousands)

December 31

Cash and equivalents


Accounts receivable
Inventories
Prepaid expenses
Other

1990
$ 9,278
139,027
153,561
9,506
14,789

1991
$ 14,820
124,824
135,925
8,677
13,809

Projected
1992
$ 17,110
145,000
145,000
10,000
14,000

Total current assets


Property, plant, and equipment
Less depreciation

326,161
218,402
111,609

298,055
239,227
122,324

331,110
274,000
137,000

Net property, plant, and equipment


Intangible assets
Other assets

106,793
6,286
10,482

116,903
1,399
11,792

137,000
1,000
12,000

$449,722

$428,149

$481,110

$ 22,797
24,299
200
86,249

$ 47,563
22,826
100
107,734

$ 50,000
25,000
1,000
122,000

Total current liabilities


Deferred taxes
Long-term debt
Deferred pension costs
Other liabilities
Total liabilities and equity

133,545
11,324
6,000
29,860
1,545
182,274

178,223
9,179
5,850
42,886
3,629
239,767

198,000
11,000
20,000
47,000
5,000
281,000

Common stock, $1 par value


Capital in excess of par
Cumulative translation adjustment
Retained earnings
Less treasury stock at cost:
1990256,151; 1991255,506
Total shareholders equity

12,570
71,916
(4,377)
194,332

12,570
71,938
13,472
97,398

12,570
71,938
18,000
104,598

(6,993)
267,448

(6,996)
188,382

(6,996)
200,110

Total assets
Bank loans
Accounts payable
Current portion of long-term debt
Accruals and other

Total liabilities and equity

$449,722

$428,149

$481,110

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Exhibit 3
NORTHBORO MACHINE TOOLS CORPORATION
Economic Indicators and Projections

3-month Treasury bill rate (at auction)


30-year Treasury bond rate
AAA corporate bond rate

1989
8.12%
8.45
9.26

Change in:
Real gross national product
2.5
Producer price index
4.8
Industrial durable equipment purchases
7.8
Price deflator
3.6
Consumer spending
6.9%

1990
7.51%
8.61
9.32

1991
5.37%
8.14
8.77

0.8
6.0
(2.6)
4.7
6.4%

(1.2)
0.01
(9.1)
4.1
3.7%

Projected
June
1992
1993
1994
3.43% 3.51% 4.52%
7.67
7.68
8.00
8.14
8.16
8.39

2.0
1.7
(1.6)
2.3
5.3%

3.2
0.3
7.5
2.5
6.2%

2.8
1.1
8.7
3.1
6.5%

Sources: U.S. Economic Outlook, WEFA Group, January 1993; Federal Reserve Bulletin, June 1992; Value Line
Investment Survey, July 17, 1992.

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Exhibit 4
NORTHBORO MACHINE TOOLS CORPORATION
Stockholder Comparative Data, 1981 and 1991
(thousands of shares)

1981
Founders families
Employees and families
Institutional investors
A. Growth-oriented
B. Value-oriented
Individual investors
A. Long-term; retirement
B. Short-term; trading-oriented
C. Other; unknown

1991

Shares
1,540
2,483

Percentage
13
20

Shares
1,540
2,063

Percentage
13
17

1,546
987

13
8

786
1,590

6
13

4,598
587
429
12,170

38
5
4
100

3,324
1,586
1,425
12,314

27
13
12
100

The investor relations department identified these categories from company records. The type of institutional investor
was identified from promotional materials stating the investment goals of the institutions. The type of individual investor
was identified from a survey of subsamples of investors.
N.B.: percentages do not add up exactly because of rounding.

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Exhibit 5
NORTHBORO MACHINE TOOLS CORPORATION
Per-Share Financial and Stock Data1

1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991

Sales/
Share
$14.62
16.11
22.40
25.81
27.37
30.26
31.87
37.97
40.97
48.56
43.88
43.16
41.76
46.32
44.18
$40.96

EPS
$0.45
0.74
0.90
1.60
2.31
2.61
2.63
2.71
2.58
3.60
2.81
0.65
0.35
(3.31)
0.70
$(7.62)

Dividends
per
Share
$0.18
0.22
0.27
0.31
0.40
0.57
0.72
0.82
0.87
0.93
1.04
1.04
1.04
0.78
0.25
$0.25

Cash
Flow/
Share
$0.98
1.30
1.44
2.06
2.85
3.27
3.36
3.62
3.64
4.84
4.28
2.24
2.01
2.88
2.00
$(0.98)

High
$20.50
21.25
21.38
18.63
22.63
24.00
26.88
29.63
40.00
41.25
39.00
47.50
40.50
30.75
31.88
$39.88

Stock Price
Low Average
$ 9.75 $14.58
10.25
14.95
8.25
13.59
10.25
13.44
12.25
18.48
18.13
21.14
18.38
22.88
19.63
24.39
20.25
29.67
27.50
34.20
21.50
32.03
29.75
37.05
27.00
31.47
22.13
26.45
22.50
27.20
$18.38 $29.15

Note: NMF = not a meaningful figure.


1
Adjusted for 3-for-2 stock split in January 1982 and 50% stock dividend in June 1986.

Average
P/E
32.4
20.2
15.1
8.4
8.0
8.1
8.7
9.0
11.5
9.5
11.4
57.0
89.9
NMF
88.2
NMF

Payout
Ratio
40%
30
30
19
17
22
27
30
34
26
37
160
297
NMF
36%
NMF

Shares
Average
Out
Yield (millions)
1.2%
10.25
1.5
10.31
2.0
10.62
2.3
11.83
2.2
11.97
2.7
12.17
3.2
12.42
3.4
12.42
2.9
12.43
2.7
12.50
3.2
12.35
2.8
12.35
3.3
12.35
2.9
12.35
1.0
12.31
0.9%
12.31

-16-

UVA-F-1208

Exhibit 6
NORTHBORO MACHINE TOOLS CORPORATION
Comparative Industry Data
(as of December 31, 1991)

Sales
(millions)

Annual
Growth Rate of
Cash Flow
Last
Next
10
35
Years
Years

Current
Dividend
Yield

+15%

Nil

Nil

28%

30%

NMF

Debt/
Equity

Insider
Ownership

P/E
Ratio

Northboro
$ 504
CAD/CAM Companies (software and hardware)
Autodesk
285
GM-EDS
7,028
Digital Equip.
13,911
Intergraph
1,195
Mentor Graphics
400
SCI Systems
1,129
Sun Microsystems
3,221
Gerber Scientific
250
Hewlett-Packard
14,494

41.51
27
13
32.5
16.01
24.5
57.9
14.5
14.0

10
9.5
10.0
5.5
16.0
9.5
29.5
5.5
12.5

20%
27
Nil
Nil
>100
Nil
Nil
59
16

1.3%
1.2
Nil
Nil
1.2
Nil
Nil
1.7
1.0

0
11
1
2
20
100
25
3
3

10
Nil
3.5
28
27
7.6
3.7
13.7
18.1

22
24
NMF
13
NMF
22
12
39
16

Electrical Industrial Equipment Manufacturers


Emerson Electric
7,427
General Electric
43,089
General Signal
1,616
Honeywell
6,193
Measurex
254

9.0
10.0
3.5
3.5
11.5

10.0
10.0
7.0
8.5
12.5

47
41
54
33
86

2.7
3.0
2.8
2.4
1.9

14
15
50
33
1

0.9
0.7
6.6
0.6
4.0

18
14
17
16
16

8.0
15.5
NA
14.0%

91
>100
13
68%

5.3
2.3
1.3
2.0%

14
100
50
1%

3.4
10.3
1.2
2.1%

30
33
21
32

Machine Tool Manufacturers


Acme-Cleveland
Cincinnati Milacron
Giddings & Lewis
Monarch

184
754
327
$ 106.6

(1.5)%

Current
Payout
Ratio

(10.5)
(5.5)
NMF
(16.0)%

NMF = not a meaningful figure because of recent reported losses.


1
Last 5 years only.
Source: Value Line Investment Survey.

-17-

UVA-F-1208

Exhibit 7
NORTHBORO MACHINE TOOLS CORPORATION
Selected Healthy Companies with High- and Zero-Dividend Payouts
(as of December 31, 1991)

Industry

Expected Return
on Total Capital
(next 35 years)

Expected Growth
Rate of Dividends
(next 35 years)

Current
Dividend
Payout

Current
Dividend
Yield

Expected Growth
Rate of Sales
(next 35 years)

Current
P/E
Ratio

High-Payout Companies
BRE Properties
Federal Realty
Idaho Power
Sierra Pacific
Halliburton
Consolidated
Sonat
Pacific Enterprises

Real estate inv.


Real estate inv.
Electric power
Electric power
Oilfield services
National gas
Gas transmission
Gas utility

13.5%
10
8.5
7.5
14.5
10.5
8.5
8.0

3.0%
9.0
1.5
0
6.5
5.5
0
0

125%
500
118
103
97
97
110
125

7.7%
7.2
7.2
8.0
3.4
4.0
4.7
15.2

8%
7
+3
(0.5)
9.0
7.5
+4
(11)

12.1
52.5
16.1
13.7
39.7
21.1
20.0
10.3

Software
Software
TV shows
Motorcycles
Retail
Retail
Retail
Network systems
Network systems

20
22.5
19.0
15.5
16.5
18.5
19.5
21.0
23.0%

0
0
0
0
0
0
0
0
0%

0
0
0
0
0
0
0
0
0%

0
0
0
0
0
0
0
0
0%

15
25
9.5
10.5
31
24
16.5
32.5
34.0%

37.2
33.9
10.4
24.1
28.9
24.3
17.8
22.2
30.3

Zero-Payout Companies
Oracle Systems
Novell
King World Productions
Harley-Davidson
Duty Free International
50-Off Stores
Lands End
Cabletron
Cisco Systems

Source: Value Line Investment Survey.

-18-

UVA-F-1208

Exhibit 8
NORTHBORO MACHINE TOOLS CORPORATION
Projected Sources and Uses Statement Assuming a 40% Payout Ratio1
(dollars in millions)

Total
1992-1998

1993
$667

1994
$767

1995
$882

1996
$1,015

1997
$1,167

1998
$1,342

12
15

27
17

38
20

49
23

61
27

65
31

107
35

$358
168

27

44

58

72

88

96

142

526

35
13

40
10

45
10

50
10

55
10

60
10

65
10

350
73

48

50

55

60

65

70

75

423

(6)
11

3
15

12
19

23
24

26
26

67
43

103
143

Excess cash (borrowings needed) after dividend1


$(26)
$(17)
$(12)

$(8)

$(1)

$0

$24

$(40)

Sales
Sources of cash:
Net income
Depreciation

Uses of cash:
Capital expenditure
Working capital

1992
$580

Excess cash (borrowings needed)1


(21)
Dividend2
5

This analysis ignores the effects of borrowing on interest and amortization. It includes all increases in long-term
liabilities and equity items other than retained earnings.
2
Dividend calculated as 40% of net income.