Finance and Dividend Payout Policy Essay

1.What argon the problems here, and what do you recommend?2.What happens to Gainesboros financial support need and unused debt capacity if a. no dividends are paid? b. a 20% payout is pursued? c. a 40% payout is pursued? d. a balance wheel payout policy is pursued?Note that case Exhibit 8 presents an bet of the amount of borrowing needed. Assume that maximum debt capacity is, as a matter of policy, 40% of the book value of equity. In addition, please baulk TN_26 provided in blackboard which impart help you verify this question. Pays no dividends If it pays no dividends, then Gainesboro would be able to channel all its earnings to neckcloth its growth strategy. Its unused debt capacity would be channelled towards the high immediate payment requirements of the faithfuls strategic emphasis on advanced technologies and CAD/CAM.20% With a 20% payout ratio, the sloshed would book positive extra cash from 2009 instead positive excess cash from 2011 with a 40% payout ratio. Th is will enable the substantial to use its excess debt capacity to fund its refinement needs, keeping within the debt-equity ratio of 40%.40% With a 40% payout ratio, the projections of 2005 would leave the debt equity ratio at 35%, which still gives the firm some debt capacity, albeit very little flexibility if it wants to keep within the 40% debt equity ratio. Perhaps the firm would have to exceed this threshold to visit its strategic growth needs, and seek more financing. residuary dividend The financing requirements would be less than that of the 20% and 40% payout, as dividends are paid only(prenominal) by and by Gainesboro has funded all the projects that offered positive net present values.3. How might Gainesboros various providers of capital, such as its stockholders and creditors, react if Gainesboro declares a dividend in 2005? What are the arguments for and against the zero payout, 40% payout, and residual payout policies? What should Ashley Swenson recommend to the board of directors with regard to a long-term dividend payout policy for Gainesboro Machine Tools Corporation? Each of the three options have their own potential advantages and harms based on the growth stage of the firm and investors perspective i.e, if it is income seek investor or capital gains investor or creditor.Generally firms that are right tend to pay high dividends because on that point are fewer opportunities for growth whereas, firms that have high growth prospects pay low/no dividends because they would reinvest the excess cash from the earnings for future growth opportunities. With reinvestments, firm could cause more returns to the investors. This would not only help the firm compete in the market place but could also increase the capital gains of the investors in terms of increase in firms share price. nobody Dividend Payout Policy Because Gainesboro is trying to reposition itself as software and high engine room firm that has high growth potential, it could a dopt a zero dividend payout policy. Although, income quest investors such as the retirees may be unattracted to a zerodividend policy, non-dividend seeking investors who prefer increased value in stock price instead of cash distribution might prefer this option.Moreover from exhibit 4 it can be seen that the firms traditional clientele, the long-term retirees, has cut from 1994 to 2004 while the short-term trading oriented clientele has increased during the identical period.40% Payout The advantage of this entree is that the firm would start repaying the dividends as it had promised to the investors. This could wage hike market confidence back in the firm and result in a positive increase in share price. But the disadvantage is that the Gainesboro will have to borrow more funds, which is against the firms strategy, to fund the dividends and its expansion plansResidual Payout This policy gives Gainesboro the flexibility to pay dividends, no matter how small, to the investors as p romised after funding the projects with positive NPVs, which would increase sales and growth prospects for the company. The con of this approach is that there would be lot of fluctuations in the dividends paid over the years, there could also be periods of zero dividends thereby, imposing negative pressure on the company.Based on the growth strategy of Gainesboro, Swenson should pay dividends as promised to the investors in 2006 and adopt a zero dividend payout policy after 2006. Gainesboro should invest the excess cash to achieve its growth goal and after the company reaches a mature stage it should start paying dividends like other mature firms in the market.