Welcome to Our Presentation on

GAINESBORO MACHINE TOOLS CORPORATION

GROUP MEMBERS
Name Syeda Farzana Mahbub Nahin Ashrafi Kazi Monira Akter Khaled Mahmood Nusrat Jahan Tithi ID No. 11-059 11-061 11-062 11-076 11-110

COMPANY PROFILE
Founded in 1923 in Concord, Hampshire. Products and business: Machinery parts, armored vehicle, war equipments, industrial presses, machinery and tools, computer-aided design and manufacturing.

QUESTIONS TO BE ANSWERED

PRESENT SITUATION AND DILEMMA

THE DIVIDEND QUESTION
Faltering in the past 5 years. Two extensive restructuring programs. 2000-2002, dividends exceeded earnings. 2003- dividends were decreased to a level below earnings. 2004- small dividends were declared. First 2 quarters of 2005- no dividends. The board has announced to resume payment of dividend sometime in 2005.

Inc.CORPORATE-IMAGE ADVERTISING Changing the name of the corporation to ´Gainsboro Advanced Systems International.µ ´Would a change of name help to positively frame investors· views of the firm?µ .

´Would a stock buyback instead of a dividend affect investors· perceptions of Gainsboro in anyway?µ .STOCK BUYBACK OR DIVIDEND In response to market shock because of Hurricane Katrina. Ashley Swenson·s dividend-decision problem has been intensified by the dilemma of choosing between to pay shareholder dividends or to buy back stock. many companies have announced buying back of stocks.

ECONOMY ANALYSIS .

Large increase in industrial production in the last 4 years. Uncertainty surrounding recent destructive impact of Hurricane Katrina. Aggressive entry of large foreign firms into CAD/CAM. Increasing real gross domestic product. Significant improvement of industrial production since 2001 that indicates a trend slightly downward in the next few years.ECONOMIC FACTORS Macroeconomic environment. . Stable level of consumer spending and GDP deflator. Highly fluctuating prices of finished goods.

INDUSTRY ANALYSIS .

-Highly competitive machinery industry. -Many Suppliers are available. -Low product differentiation. Bargaining power of suppliersMODERATE Threats of new entrantsMODERATE -It requires a huge investment to enter into the industry. . Many firms producing machineries and industrial products. Rivalry among existing competitorsHIGH -There is low switching cost.-Volume of purchase is significant. -Difference between the products are not that great. -Competitors are strong and dominating. -Barriers to entry are low due to fragmented nature of the industry. Bargaining power of buyers-HIGH Threats of substitute productsHIGH Similar products are available.

SOWT ANALYSIS .

Entering into new field of computer-aided design and computer-aided manufacturing (CAD/CAM). A true industry leader among the small local firms with limited customers in the CAD/CAM industry. .TECHNOLOGICAL FACTORS/ STRENGTHS Innovative producer of industrial machinery and machine tools. Developing superior line of CAD software and equipment. Development of superior line of CAD software and equipment.

Successful introduction of the Artificial Workforce series. . Delayed production growth due to manufacturing mishaps and missing components.PROBLEMS/ WEAKNESS OPPORTUNITIES ´ ´ ´ Fell behind in competition in the development of usefriendly software. ´ ´ ´ ´ Devotion of greater share of R&D budget to CAD/CAM. Development of products in the chemicals industry. High start-up costs. Expanding international market.

THREATS Competition from large firms like Autodesk. Cadence Design. The aggressive entry of large foreign firms.. Losses from two massive restructurings. . Market shock due to hurricane Katrina and falling of stock prices. Inc.

RATIO ANALYSIS .

‡Gainesboro·s poor return on assets indicates its inability to generate revenues from the assets it owns. or a negative margin. ‡Lower operating margin indicates high financial risks for the co. ‡Higher 0 .PROFITABILITY RATIOS 40 20 10 200 Gross margin Profit margin Return on equity Return on net assets Return on assets Operating margin 0 2004 2005 -10 -20 . ‡The co·s very low return on equity shows the co. has been unable to use its funds to generate growth. ‡Lower profit margins indicate a low margin of safety for the co.: higher risk that a decline in sales will erase profits and result in a net loss.0 -40 -50       or increasing gross margins for Gainesboro reflect greater efficiency in turning raw materials into income.

Lower ratios indicate the co·s low amount of long term debt in proportion of shareholders· equity.LEVERAGE RATIOS Gainesboro·s debt ratios are moderately high and have an increasing trend. That indicates the co.·s frequent use of debt to collect assets. 60 50 40 2003 2004 2005 20 30 10 0 Debt ratio (%) Debt/equity ratio Long term debt to (%) equity Financial leverage .

5 0 2003 -5 2004 2005 -10 EPS -15 Dividend cover -20 -25 -30 -35 . Dividend cover increased in 2005 but it·s less than the figure of year 2003.MARKET RATIOS Gainesboro·s EPS increased in year 2005 from a negative earning in 2004.

5 2 1.LI TI I IT The liquidity ratios have been decreasing for Gainesboro which is a very alarming sign for the company indicating its inability to meet its current liabilities and payments through current assets. 2.5 Current ratio Quick ratio 1 Cash ratio 0.5 0 2003 2004 2005 . It indicates its running out of cash or liquid assets. It threatens the company·s financial position because of its poor liquidity condition.

The figures are quiet high and have been stable that means it takes a long time for Gainesboro to collect its receivables. 18 .ACTIVITY RATIOS 16 14 12 1 ¡ 2 ¡ 4 2 2 ¡¡ ¡¡ ¡¡ ¡ 6 ¡ 8 ¡ ¡ ¡ ¡ 2 3 4 5 ¡¡ ¡ Decreasing asset turnover ratio indicates the company·s failure to generate enough revenue from its assets. Inventory turnover has been stable though the figures are minimal indicating the company·s inability to convert its inventories to sales.

93% 1.24% 2004 -18.92% 227.15% 3.83% 2005 2.82% -21. Equity ROE 2003 1.30% -49.92% -21.93% 168.96% 1.00% .61% 117.50% 2.59% 120.35% 6.DUPONT ANALYSIS Net Profit AT/Sales Sales/Total Assets ROA Net Profit AT/Total Assets Total Assets/Stockhldrs.07% 120.61% 2.50% 240.

RISK ANALYSIS .

52 0.BUSINESS RISK Net income volatility Mean STD CV -140785 76902.06747 .87 0.54624 Sales volatility Mean STD CV 756638 51050.

21187 -140785 -11.7569 .04927 2004 756638 -0.07272 Net income (loss) % change in net income -61322 12992 -1.DOL 2002 Net sales % change in sales 858263 2003 815979 -0.8363 DOL 24.59794 162.

12798 0.25 1.FINANCIAL RISK 2002 Net income (loss) % change in net income EPS % change in EPS DFL -61322 2003 12992 -1.21187 0.011383 1.21231 2004 -140785 -11.000365 1.12946 -3.69 -1.971 2005 18018 -1.57 -11.98 -1.8363 -7.001309 .

41 0.03 4.3 0.00 .BANKRUPTCY RISK Z score Weight WC/TA RE/TA EBIT/TA MVE/TL SALES / TA 1.23 -0.2 1.21 1.53 1.23 1.18 2.43 0.6 1 2003 0.94 2004 0.4 3.21 4.25 0.

SIMULATION .

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DIVIDEND DECISION .

There are three main factors that may influence a firm's dividend decision: Free-cash flow Dividend clienteles Information signaling .

any cash that is surplus after it invests in all available positive net present value projects.THE FREE CASH FLOW THEORY OF DIVIDENDS The firm simply pays out. . as dividends.

these policies are not always in the best long-term interests of the company.DIVIDEND CLIENTELES Shareholders who pressure a company to follow a certain dividend policy. Often. the dividend clientele asks the company to change the schedule of dividend payments to that which is most favorable to them. However. . usually in order to minimize their own tax liability.

Managers have more information than investors about the firm. Stock prices tend to increase when an increase in dividends is announced and tend to decrease when a decrease or omission is announced. Conversely.INFORMATION SIGNALING Dividend announcements convey information to investors regarding the firm's future prospects. and such information may inform their dividend decisions. . or possibly even reduce the amount of dividends paid out. When managers lack confidence in the firm's ability to generate cash flows in the future they may keep dividends constant. a full order book) are more likely to increase dividends.g. managers that have access to information that indicates very good future prospects for the firm (e.

PROBLEM STATEMENTS .

such as its stockholders and creditors may react at different level of dividend payout? Would a stock buyback instead of dividend affect investors· perceptions? Would a change of name help to positively frame investor·s view of the firm? .What is the market view towards Gainesboro?    a company on the wane a blue chip stock a potential growth no dividends are paid? a 20% payout is pursued? a 40% payout is pursued? a residual payout policy is pursued? What happens to Gainesboro·s financing need and unused debt capacity if:     How the various providers of capital of Gainesboro.

 What is the market view towards Gainesboro? a company on the wane a blue chip stock a potential growth .

Criteria Revenue Earnings Market size Competition Product portfolio Dividend Bluechip High Consistent Higher Cost efficient Diversified Regular Co. on wane low Fluctuate Low niche Limited irregular Potential growth High growth Accelerate Huge Market dominance Diversified Low Gainseboro High growth moderate Large Cost efficient Diversified Moderate .

What happens to Gainesboro·s financing need and unused debt capacity if: no dividends are paid? a 20% payout is pursued? a 40% payout is pursued? a residual payout policy is pursued? .

8 -7.0 46.0% 0% 2006 1000.6 -44.4 72.3 -22.3 0.9 77.5 212.0 -50.0 -57.6 0.5% 0% 2008 1323.6 0.0 52.4 -22.5 2007 15% 5.2 0.0 29.5 30 87.3 40.3 0.5 40.5 -34 -102.8 -83.0 27.0 77.3 -134.1 22.8 2010 15% 5.5 0.0 -7.3 0.1% 0% 2005 870.5 2011 15% 8.5 29.8 -38.3 4.3 2009 15% 6.5 0.3 0.0 25.2 0.1 18.5 65.1 98.5 107.0 -22.0 -90.0 4.2 0.0 11.6 -95.0 -78.0% 0% 2007 1150.0% DIVIDEND PAYOUT 0% f divid nd pay ut Sal s Gr wth Rat Net Inc me as % f sales Diveidend-Pay ut Rati 2005 15% 2.7 0.0% 0% 2009 1521.8 34.9 91.5 -117.2 -29.0 .8 -19.5 131.5 Sales Sources: Net Income Depreciation Total Uses: Capital Expenditures Change in working capital Total Excess Cash/ Borrowing Needs Dividend Total excess cash/borrowing Dividend per share -43.7 40.8 11.7 0.5 2008 15% 5.0 -66.8 57.5 -63.7 160.0 -68.4 -72.6% 0% 2010 1750.2 0.5 -25.0% 0% 2011 2012.5 144.3 27.6 2006 15% 4.

9 0.5 65.0 13.1 22.8 34.3 -134.3 0.3 -66.1 -17.7 160.0 25.5% 40% 2008 1323.0 -18.5 -117.4 72.1 -90.6 -68.5 107.8 -57.5 -25.2 39.8 -7.6 -95.5 29.1 98.8 2010 15% 5.7 40.5 -63.3 27.3 16.0% 40% 2009 1521.5 2011 15% 8.6 64.3 4.5 131.5 -34 -102.8 11.5 Sales Sources: Net Income Depreciation Total Uses: Capital Expenditures Change in working capital Total Excess Cash/ Borrowing Needs Dividend Total excess cash/borrowing Dividend per share -43.6 3.5 .8 -83.3 2009 15% 6.0 52.5 -7.0% 40% 2006 1000.6 2006 15% 4.1% 40% 2005 870.5 212.4 -22.0 2.40% DIVIDEND PAYOUT 40% of dividend payout Sales Growth Rate Net Income as % of sales Diveidend-Payout Ratio 2005 15% 2.0 -23.7 7.4 -72.8 1.8 -38.0% 40% 2007 1150.6 1.2 2.3 40.0 46.2 -29.9 77.5 2007 15% 5.5 2008 15% 5.4 -50.6 -44.1 18.6% 40% 2010 1750.8 -19.3 36.9 91.8 57.2 23.5 29.5 30 87.3 -22.0% 40% 2011 2012.5 144.2 -29.5 40.2 -12.0 -78.

0 1.0 0.5 -90.5 131.0 46.0% 0% 2009 1521.9 91.5 2008 15% 5.0 -7.3 29.6 2006 15% 4.0% 0% 2007 1150.3 0.6 0.4 -72.6% 0% 2010 1750.7 160.8 2010 15% 5.3 27.6 -68.7 0.7 40.4 -22.0% 0% 2011 2012.0 52.3 4.8 57.5 65.0 -22.5 107.2 -29.8 -38.0 0.3 2009 15% 6.5 0.2 0.5 -117.0 25.6 -44.5 -34 -102.3 -22.5 2011 15% 8.8 11.0 4.5 Sales Sources: Net Income Depreciation Total Uses: Capital Expenditures Change in working capital Total Excess Cash/ Borrowing Needs Dividend Total excess cash/borrowing Dividend per share -43.0% 0% 2006 1000.7 0.5 -25.6 -78.RESIDUAL DIVIDEND PAYOUT Residual dividend payout Sales Growth Rate Net Income as % of sales Diveidend-Payout Ratio 2005 15% 2.1 18.2 27.5 144.5% 0% 2008 1323.0 -57.5 11.3 -134.5 29.1 98.2 4.6 77.2 0.6 -95.1 22.1% 0% 2005 870.5 30 87.3 0.4 72.5 -63.5 2007 15% 5.3 0.9 77.5 212.8 -19.5 40.8 34.0 -50.2 .0 1.8 -83.8 -7.2 -66.3 40.

Cash flow projection of company Projected excess cash 200 150 100 50 0 2005 2006 2007 2008 2009 2010 2011 -50 -100 0% Div 30% Div 40% Div .

HOW THE VARIOUS PROVIDERS OF CAPITAL OF GAINESBORO. SUCH AS ITS STOCKHOLDERS AND CREDITORS MAY REACT AT DIFFERENT LEVEL OF DIVIDEND PAYOUT? .

035 .Affect of dividend policy on price R2=0.

37 78.02 10.0% 9.86 731.49 49.SENSITIVITY Sensitivity Analysis Intrinsic gLValue 25.93 64.42 110.86 731.32 gS = 10.71 61.15 112.06 38.08 65.30 52.00 11.41 764.71 61.69 715.0% 29.5% 10.48 73.88 36.95 176.71 117.10 43.52 57.0% 10.54 34.09 81.0% 6.27 40.42 110.5% 9.49 193.41 102.5% 8.89 34.5% 9.99 197.81 6.5% 32.41 50.0% 30.5% 7.71 12.0% 7.84 12.05 76.27 25.5% 9.79 38.5% 10.59 46.0% 8.5% 31.27 180.5% 30.21 35.0% 32.72 80.04 188.35 37.64 184.0% 8.81 62.65 36.92 114.10 43.81 6.5% 8.37 78.30 42.04 188.27 11.52 39.5% 29.0% 7.48 83.51 41.27 54.59 48.0% 6.0% 10.5% 7.06 38.5% 30.72 107.70 47.56 58.00 31.75 45.41 50.88 .81 781.63 60.58 683.97 35.92 44.05 105.74 40.10 747.89 34.53 201.60 699.35 51.76 75.0% 9.25 33.62 32.

REACTION Institutional growth oriented Institutional value oriented Individual investors long term retirement Short-term trading oriented .

WOULD A STOCK BUYBACK INSTEAD OF DIVIDEND AFFECT INVESTORS¶ PERCEPTIONS? .

REPURCHASE PERCEPTION Management thinks its shares are undervalued Earning per share increases with number of shares Higher market price of the remaining shares .

INVESTORS¶ PERCEPTIONS .

WOULD A CHANGE OF NAME HELP TO POSITIVELY FRAME INVESTOR¶S VIEW OF THE FIRM? .

product offerings) and those changes are for the betterµ Change in brand attitude helps predict future business performance . name changes signal improved profit performance and increase stock price A change in company brand name says to the market. ´We have changed our company (i. organization. brand strategy..ADVERTISEMENT CAMPAIGN Enhance the firm·s visibility and image Company name is as integral part.e. management. just like its products or technical service In most cases.

725) (1.JUDGMENT Probability High Average Low Value addition 30% 40% 30% 2005 (4.088) (2.$10 million Profitable to invest in 2009 .151) 2009 172 115 57 268 Sales growth 17% Cost .363) (17.

RECOMMANDATION 30% dividend policy should be adopted Repurchase stock by residual earnings year after 2005 Advertisement campaign can be adopted in 2009 .

JUSTIFICATION 30% dividend policy should be adopted Projected excess cash 200 150 100 50 0 2005 -50 2006 2007 2008 2009 2010 2011 -100 0% Div 30% Div 40% Div .

45 .00 FCF DDM PAT P/E 26.Repurchase stock by residual earnings year after 2005 30.50 12.09 20.00 15.00 20.00 5.07 25.00 10.00 0.00 26.

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