Gainesboro Machine Tools Corporation

Abstract

In mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM (computer aided design and manufacturing) equipment manufacturer must decide whether to pay out dividends to the firms shareholders, or repurchase stock. If Swenson chooses to pay out dividends, she must also decide on the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising, and change its corporate name to reflect its new outlook. The case serves as an omnibus review of the many practical aspects of the dividend and share buyback decisions, including (1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share repurchase decisions. This case can follow a treatment of the Miller Modigliani dividend-irrelevance theorem and serves to highlight practical considerations in setting dividend policy.