Northboro Machine Tools Corporation

Submitted By : Group 7
Overview of the situation
• Christine Olsen, who is the chief financial officer of the Northboro machine Tool Company, must
propose to the board of directors a dividend policy for implementation at the end of the quarter
III of the year 1992 (1990, dividends dropped below the income level) , in 1991 despite large
losses, the board is still announcing a small dividend level.
• Olsen had to choose between three recommended dividend policies:
– No dividends paid
– A dividend payment rate of 40% or a dividend of $0.20 per share, which will restore the
respective annual dividend rate of $0.80 per share.
– Surplus dividend policy
• Not only that, Olsen needs to propose an action on the Board of recommendation to start a
company image advertising campaign accompanied by renaming the company to Northboro
Advanced Systems International, Inc. From the Board of directors
• We will analyze and make dividends policy decisions
Issue 1. Do not pay dividends or dividend payments?

According to the following analyses, the company should select the dividend payment policy:
1. Observation of Shareholder data table
– For TA comment: from the 1981-1991 period: the percentage of investor growth
decreased, the rate of investor-value increase shows that investors see Northboro as a
company that is entering the period of steady profit. Paying dividends is an
indispensable thing
2. Company revenues are trending down
– Not only that Northboro business is being fiercely competitive. "CAD/CAM industry,
some major companies including General Electric, Hewlett-Packard and Digital
Equipment are next to the position in this growing market.“
– Northboro Uptime is 68 years this is quite a long time to business through the inception
phase of creation.
– Most likely investors see Northboro as a mature company that has a low rate of profit
increase.
– So Northboro's dividend is reasonable.
Issue 2: How does the dividend break do?
Case 1: Dividend payment policy

Benefits
- The Board of Directors shall not be financially pressured, according to group 8 if the company does
not pay dividends, the company only has a lack of money in 2 years (1992 year is 21 million, 1993
is 6 million) and after 7 years of operation, the company will get the word 103 million.
- Many people in the company think that year 1992 is the first year of 1 new era therefore the policy
does not pay dividends, use this money to reinvest is appropriate

Damage
- To reduce the reputation of the company because "in a special letter to the shareholders, the
board has committed to restoring the dividend level as soon as possible – ideally in 1992".
- If the board does not make its pledge will make the stock price drop and most importantly lose the
trust of the investor (once faith is lost, it is extremely bad).
Case 2: Surplus dividend payment Policy

Benefit:
- Projects with positive NPV are preferred investment. Financial burden is mitigated

Damage:
- This policy does not satisfy the value investors, it shows the profits and the needs of
the company's cash is constantly fluctuative, creating more RBS.
- It makes the company's reputation unconsolidated because the dividend pay rate is not
maintained steadily and gives us the feeling that the company is struggling financially
and the prospect of poor profits.
- Similar to the policy of non-dividend payment, the policy will lose confidence of
investors because in 1992 and 1993 the demand for dividends of the company is-21
million dollars and-6 million dollars so the company will not be able to pay dividends.
Case 3: Dividend payment of 40%

Benefit:
- According to table 5 we see, from 1976 to now the company pays the annual dividends. Dividends
increase from 1976 to 1986 (0.18 – $0.93/cp), the peak is from 1986 to 1988 ($ 1.04/CP), then from
1989 to 1991 the dividend has decreased (0.78 – $0.25/CP).
- If we do not pay dividends now will cause investors to feel insecurity about the company
- Do not lose the credibility of the company because the company has done exactly what you
committed to the investor.
- According to table 7, we find that companies that do not pay dividends are outside of Northboro's
business area, which indicates that competitors maintain a stable dividend payment policy. If the
dividend is not paid, Northboro will be difficult to make sure that its attraction to investors is
against the same industry rivals.
- Paying dividends will make the company easy to mobilize capital in the next time.
Damage
- The financial pressure is very large
- According to the data sheet, we see that the company will have a shortage of money for a
period of 5 years (from 1992 to 1996) and after seven years of operation company Hole 40
million. Such dividend policies are no different than "suicide.“
- To pursue this dividend policy, the company must take a loan or release a new stake to
compensate for this deficiency, which leads to a very high financial risk.
Recommendation
Residual Dividend Payout Policy
• Not 0: Not a start up (1923)
• Not 40%: Not mature, surety
• Few large publicly held firms
• Growing firm
• Restructuring done in 1989, 1992
• Irrelevant (MM)
• Capital growth
• Upward stickiness
• High growth firms paid lower dividends
• EPS: negative in 1991; can’t assure
• DPS is decreasing since 1989; non surety
• Cash Flow per Share: negative in 1991
• Average stock price increased to $29.15 in 1991
– Investors trust in management decisions
• High & low of stock price: new extremes in 1991
– Investors suspicion
– Might know about payout dilemma, growth
• Sales ($504 M) less than most comparative firms
• Annual growth rate: -1.5% to +15%
– Below to above industry average
• Insider ownership is 30%
• D/E 28%: > most in comparative industry
– 3 requirements for payout
Thank you