Welcome to Our Presentation on

Name ID No.

Syeda Farzana Mahbub 11-059

Nahin Ashrafi 11-061
Kazi Monira Akter 11-062
Khaled Mahmood 11-076
Nusrat 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
-Volume of purchase is enter into the industry.
significant. -Barriers to entry are low due to
-Many Suppliers are available. fragmented nature of the industry.

-Competitors are strong

-There is low switching and dominating.
cost. -Highly competitive
-Low product machinery industry.
differentiation. -Difference between the
products are not that
great.
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 2005
Net 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 volatility
Mean -140785
STD 76902.87
CV 0.54624

Sales volatility

Mean 756638
STD 51050.52
CV 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 flow
Dividend clienteles
Information 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 Gainseboro
growth
Revenue High low High growth High growth

Earnings Consistent Fluctuate Accelerate moderate

Market size Higher Low Huge Large

Competition Cost efficient niche Market Cost efficient

dominance
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 2011
Sales 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 2011

Sales 870.1 1000.7 1150.8 1323.4 1521.9 1750.1 2012.7
Sources:
Net Income 18.1 40.0 57.5 72.8 91.3 98.0 160.0
Depreciation 22.5 25.5 30 34.5 40.5 46.5 52.5
Total 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 -90.6
Change in working capital -19.5 -22.4 -25.8 -29.6 -34 -38.5 -44.3
Total -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 77.6
Dividend 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total 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 2011
Sales 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 2011

Sales 870.1 1000.7 1150.8 1323.4 1521.9 1750.1 2012.7
Sources:
Net Income 18.1 40.0 57.5 72.8 91.3 98.0 160.0
Depreciation 22.5 25.5 30 34.5 40.5 46.5 52.5
Total 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 -90.6
Change in working capital -19.5 -22.4 -25.8 -29.6 -34 -38.5 -44.3
Total -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 77.6
Dividend 7.2 16.0 23.0 29.1 36.5 39.2 64.0
Total 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 2011
Sales 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 2011

Sales 870.1 1000.7 1150.8 1323.4 1521.9 1750.1 2012.7
Sources:
Net Income 18.1 40.0 57.5 72.8 91.3 98.0 160.0
Depreciation 22.5 25.5 30 34.5 40.5 46.5 52.5
Total 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 -90.6
Change in working capital -19.5 -22.4 -25.8 -29.6 -34 -38.5 -44.3
Total -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 77.6
Dividend 0.0 0.0 4.2 11.5 29.3 27.2 77.6
Total 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 oriented
Institutional value oriented
Individual investors long term retirement
Short-term trading oriented
Management thinks its shares are undervalued
Earning per share increases with number of
shares
Higher market price of the remaining shares
Enhance the firm’s visibility and image
Company name is as integral part, just like its products or
technical service
In 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
   Probability 2005 2009
High 30% (4,088) 172
Average 40% (2,725) 115
Low 30% (1,363) 57
Value addition   (17,151) 268

Sales growth 17%

Cost - $10 million
Profitable to invest in 2009
30% dividend policy should be adopted
Repurchase stock by residual earnings year after
2005
Advertisement campaign can be adopted in 2009
30% dividend policy should be adopted
Repurchase stock by residual earnings year after
2005