Affect? Residual payout * Include advantage and disadvantages of having a residual payout Introduction – * Founded in 1923 by two engineers James Gaines and David Carbons * The firm was initially manufacturing metal machinery parts. * Participated in the second world war by manufacturing metal parts for vehicles and tanks. * 1975 firm and entered In the machine tool Industry. * In the ass’s the company made Its entry In the Computer aided Design/ Manufacturing ( CAD/CAM) working In cooperation In software company . The figures were good in the ass an Gainsayers continued to perfect its hardware and software.
Nevertheless , due to an increase in international competition and lack of development of user-friendly software at the beginning of the second century the revenue decreased by 17% in areas from $911 million in 1998 to $757 million in 2004. * Dividend per share fell from $1. 03 in 2001 to $0. 25 in 2004. ( bringing the share price down from an average of $61 in 2003 to $29 in 2004 But that dividends are a signal of a firm’s earnings prospects and therefore the firm may be entering a period of low earnings, based on the dividends paid.
Brave et al. (2005) suggested that ‘dividend policy Is conservative, driven mainly by the arrest’s asymmetric reaction to dividend Increases and decreases. ‘ But thanks to two restructuring in 2002 and 2004 for a total cost of $154 million, Gainliness’s situation * Mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM (computer aided design and manufacturing) equipment manufacturer must submit a new dividend policy for the company to the Board of Directors. Due to the Hurricane Strain causing significant destruction in the south east part of United State, the stock market went down and Gainliness’s stock had fallen about 18 % * Ashley Swenson has to decided whether pay shareholder dividends or buy jack stock. * The company wants also change his name from Gainsayers Machine Tools to Gainsayers Advanced Systems International, Inc. Which reflects a stronger emphasis on IT. Expecting an improvement in the perception of the company.
Reaction of various providers of capital : founders’ families, holding 13% may not have a regular income, thus might appreciated a dividend. * 13% of Gainliness’s shareholding is short term trading oriented * 39% of shareholders will disapproved if Gainsayers declared a no dividend in 2005. Reactions; * Shareholders: will not like the perceived idea of not having any dividends is not desired by any shareholders . Dividends are of a sticky nature and shareholders may sell off shares that fail to pay substantial dividends based on their individual expectations (we expect that shareholders expect some form of dividend) *
Bankers: the conclusion of a zero dividend payout may be desired by bankers as the firm is not obtaining further debt, but instead may be able to use any excess funds to pay back current debt DIVIDEND PAYOUT. Advantage . * Beneficial for the firm’s share price ( but only if the earning increase) * Debt covenant reduce agency costs = good sign * Share price increase so external financing by share issues more effective. * 40% payout ratio will increase the cost of debt and put at risk its investment opportunities * According to Acquits and Mullions (1986,36) dividend signaling is more effective for lower risk firms, which Gainsayers is not.
Raise the capital to pay dividend by borrowing more will lead to an increase of debt to equity ratio and consequently financial risk. * Gainliness’s shareholding is constituted at 26% of long term retirement investors. * 6% is growth term trading oriented * The employees and their families, holding 17% already have an income and thus do not need dividends; they are more interested in long term capital gains and thus will not react positively. But Even though they already have an income shouldn’t they still be entitled too dividend payout? If Gainsayers declares a dividend in 2005, debt holders will not be pleased. Reactions: * Shareholders: shareholder might be satisfied by an increase in their share price but their reaction depend if they are looking for long term investment or short term trading * Bankers: the conclusion off zero dividend payout may be desired by bankers as the firm is not obtaining further debt, but instead may be able to use any excess funds to pay back current debt.