Case-8, Group-8

Welcome to Our Presentation on

Name ID No.

Syeda Farzana Mahbub 11-059Nahin Ashrafi 11-061Kazi Monira Akter 11-062Khaled Mahmood 11-076Nusrat Jahan Tithi 11-110

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

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.

Changing the name of the corporation to “Gainsboro Advanced Systems International, Inc.”

“Would a change of name help to positively frame investors’ views

of the firm?”

In response to market shock because of Hurricane Katrina, many companies have announced buying back of stocks.Ashley Swenson’s dividend-decision problem has been intensified by the dilemma of choosing between to pay shareholder dividends or to buy back stock.

“Would a stock buyback instead of a dividend affect investors’ perceptions

of Gainsboro in anyway?”

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

-It requires a huge investment to enter into the industry.-Barriers to entry are low due to fragmented nature of the industry.

-Competitors are strong and dominating.-Highly competitive machinery industry.-Difference between the products are not that great.

-There is low switching cost.-Low product differentiation.

-Volume of purchase is significant.-Many Suppliers are available.

Similar products are available.Many firms producing machineries and industrial products.

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

Fell behind in competition in the development of use-friendly software.

Delayed production growth due to manufacturing mishaps and missing components.

High start-up costs.

Devotion of greater share of R&D budget to CAD/CAM.

Successful introduction of the Artificial Workforce series.

Expanding international market.

Development of products in the chemicals industry.

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

•Higher or increasing gross margins for Gainesboro reflect greater efficiency in turning raw materials into income.•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, or a negative margin.•Lower operating margin indicates high financial risks for the co.•The co’s very low return on equity shows the co. has been unable to use its funds to generate growth.•Gainesboro’s poor return on assets indicates its inability to generate revenues from the assets it owns.

Gainesboro’s debt ratios are moderately high and have an increasing trend. That indicates the co.’s frequent use of debt to collect assets.Lower ratios indicate the co’s low amount of long term debt in proportion of shareholders’ equity.

Gainesboro’s EPS increased in year 2005 from a negative earning in 2004.Dividend cover increased in 2005 but it’s less than the figure of year 2003.

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. It threatens the company’s financial position because of its poor liquidity condition. It indicates its running out of cash or liquid assets.

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.The figures are quiet high and have been stable that means it takes a long time for Gainesboro to collect its receivables.

2003 2004 2005Net Profit AT/Sales 1.59% -18.61% 2.07%Sales/Total Assets 120.96% 117.82% 120.61%

ROA 1.93% -21.92% 2.50%Net Profit AT/Total Assets 1.93% -21.92% 2.50%

Total Assets/Stockhldrs. Equity 168.15% 227.30% 240.35%ROE 3.24% -49.83% 6.00%

Net income volatilityMean -140785STD 76902.87CV 0.54624

Sales volatility

Mean 756638STD 51050.52CV 0.06747

2002 2003 2004

Net sales 858263 815979 756638

% change in sales -0.04927 -0.07272

Net income (loss) -61322 12992 -140785

% change in net income -1.21187 -11.8363

DOL 24.59794 162.7569

2002 2003 2004 2005

Net income (loss) -61322 12992 -140785 18018% change in net income -1.21187 -11.8363 -1.12798

EPS -3.25 0.69 -7.57 0.98% change in EPS -1.21231 -11.971 -1.12946

DFL 1.000365 1.011383 1.001309

Z score

Weight 2003 2004

WC/TA 1.2 0.41 0.25

RE/TA 1.4 0.43 0.23

EBIT/TA 3.3 0.03 -0.21

MVE/TL 0.6 4.23 1.53

SALES / TA 1 1.21 1.18

4.94 2.00

There are three main factors that may influence a firm's dividend decision:Free-cash flowDividend clientelesInformation signaling

The firm simply pays out, as dividends, any cash that is surplus after it invests in all available positive net present value projects.

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

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

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

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?

How the various providers of capital of Gainesboro, 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

Criteria Bluechip Co. on wane

Potential growth

Gainseboro

Revenue High low High growth

High growth

Earnings Consistent

Fluctuate Accelerate moderate

Market size Higher Low Huge Large

Competition Cost efficient

niche Market dominance

Cost efficient

Product portfolio

Diversified

Limited Diversified Diversified

Dividend Regular irregular Low 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?

0% of dividend payout 2005 2006 2007 2008 2009 2010 2011Sales Growth Rate 15% 15% 15% 15% 15% 15% 15%Net Income as % of sales 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%Diveidend-Payout Ratio 0% 0% 0% 0% 0% 0% 0%

2005 2006 2007 2008 2009 2010 2011Sales 870.1 1000.7 1150.8 1323.4 1521.9 1750.1 2012.7Sources:Net Income 18.1 40.0 57.5 72.8 91.3 98.0 160.0Depreciation 22.5 25.5 30 34.5 40.5 46.5 52.5Total 40.6 65.5 87.5 107.3 131.8 144.5 212.5

Uses:Capital Expenditures -43.8 -50.4 -57.5 -66.2 -68.5 -78.8 -90.6Change in working capital -19.5 -22.4 -25.8 -29.6 -34 -38.5 -44.3Total -63.3 -72.8 -83.3 -95.8 -102.5 -117.3 -134.9

Excess Cash/ Borrowing Needs -22.7 -7.3 4.2 11.5 29.3 27.2 77.6Dividend 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total excess cash/borrowing -22.7 -7.3 4.2 11.5 29.3 27.2 77.6

Dividend per share 0.0 0.0 0.0 0.0 0.0 0.0 0.0

40% of dividend payout 2005 2006 2007 2008 2009 2010 2011Sales Growth Rate 15% 15% 15% 15% 15% 15% 15%Net Income as % of sales 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%Diveidend-Payout Ratio 40% 40% 40% 40% 40% 40% 40%

2005 2006 2007 2008 2009 2010 2011Sales 870.1 1000.7 1150.8 1323.4 1521.9 1750.1 2012.7Sources:Net Income 18.1 40.0 57.5 72.8 91.3 98.0 160.0Depreciation 22.5 25.5 30 34.5 40.5 46.5 52.5Total 40.6 65.5 87.5 107.3 131.8 144.5 212.5

Uses:Capital Expenditures -43.8 -50.4 -57.5 -66.2 -68.5 -78.8 -90.6Change in working capital -19.5 -22.4 -25.8 -29.6 -34 -38.5 -44.3Total -63.3 -72.8 -83.3 -95.8 -102.5 -117.3 -134.9

Excess Cash/ Borrowing Needs -22.7 -7.3 4.2 11.5 29.3 27.2 77.6Dividend 7.2 16.0 23.0 29.1 36.5 39.2 64.0Total excess cash/borrowing -29.9 -23.3 -18.8 -17.6 -7.2 -12.0 13.6

Dividend per share 0.4 0.8 1.3 1.6 2.0 2.1 3.5

Residual dividend payout 2005 2006 2007 2008 2009 2010 2011Sales Growth Rate 15% 15% 15% 15% 15% 15% 15%Net Income as % of sales 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%Diveidend-Payout Ratio 0% 0% 0% 0% 0% 0% 0%

2005 2006 2007 2008 2009 2010 2011Sales 870.1 1000.7 1150.8 1323.4 1521.9 1750.1 2012.7Sources:Net Income 18.1 40.0 57.5 72.8 91.3 98.0 160.0Depreciation 22.5 25.5 30 34.5 40.5 46.5 52.5Total 40.6 65.5 87.5 107.3 131.8 144.5 212.5

Uses:Capital Expenditures -43.8 -50.4 -57.5 -66.2 -68.5 -78.8 -90.6Change in working capital -19.5 -22.4 -25.8 -29.6 -34 -38.5 -44.3Total -63.3 -72.8 -83.3 -95.8 -102.5 -117.3 -134.9

Excess Cash/ Borrowing Needs -22.7 -7.3 4.2 11.5 29.3 27.2 77.6Dividend 0.0 0.0 4.2 11.5 29.3 27.2 77.6Total excess cash/borrowing -22.7 -7.3 0.0 0.0 0.0 0.0 0.0

Dividend per share 0.0 0.0 0.2 0.6 1.6 1.5 4.2

Affect of dividend policy on price

R2=0.035

Sensitivity Analysis

Intrinsic

gLValue gS =

25.81 25.81 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5%

6.0% 30.89 6.0% 29.00 29.62 30.25 30.89 31.54 32.21 32.88

6.5% 34.06 6.5% 31.97 32.65 33.35 34.06 34.79 35.52 36.27

7.0% 38.10 7.0% 35.74 36.51 37.30 38.10 38.92 39.75 40.59

7.5% 43.41 7.5% 40.70 41.59 42.49 43.41 44.35 45.30 46.27

8.0% 50.71 8.0% 47.52 48.56 49.63 50.71 51.81 52.93 54.08

8.5% 61.37 8.5% 57.48 58.76 60.05 61.37 62.72 64.09 65.48

9.0% 78.42 9.0% 73.41 75.05 76.72 78.42 80.15 81.92 83.71

9.5% 110.04 9.5% 102.95 105.27 107.64 110.04 112.49 114.99 117.53

10.0% 188.86 10.0% 176.58 180.60 184.69 188.86 193.10 197.41 201.81

10.5% 731.27 10.5% 683.32 699.02 715.00 731.27 747.84 764.71 781.88

Institutional growth orientedInstitutional value orientedIndividual investors long term retirementShort-term trading oriented

Management thinks its shares are undervaluedEarning per share increases with number of sharesHigher market price of the remaining shares

Enhance the firm’s visibility and imageCompany name is as integral part, just like its products or technical serviceIn most cases, 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.e., brand strategy, management, organization, product offerings) and those changes are for the better”Change in brand attitude helps predict future business performance

Sales growth 17%Cost - $10 millionProfitable to invest in 2009

Probability 2005 2009

High 30% (4,088) 172

Average 40% (2,725) 115

Low 30% (1,363) 57

Value addition (17,151) 268

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

30% dividend policy should be adopted

Repurchase stock by residual earnings year after 2005