Answer the below question based on the case study listed along-with.

Question:What happens to Gainesboro's financing 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 residual payout policy is pursued?

Note that case Exhibit 8 presents an estimate of the amount of borrowing needed. Assume that maximum debt capacity is, as a matter of policy, 40% of the book value of equity.

Case Study: Gainesboro Machine Tools Corp.

Exhibit 8 GAINESBORO MACHINE TOOLS CORPORATION Projected Sources-and-Uses Statement Assuming a 40% Payout Ratio (dollars in millions) Assumptions. 2005 2006 2007 2008 2009 2010 2011 1. Sales Growth Rate: 15% 15% 15% 15% 15% 15% 15% 2. Net Income as % of Sales 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0% 3. Dividend-Payout Ratio 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% Projections: Total 2005 2006 2007 2008 2009 2010 2011 2005-11 Sales $ 870.1 $ 1,000.7 $ 1,150.8 $ 1,3234 $ 1,521.9 $ 1,750.1 $ 2,012.7 $ 9.629.6 Sources: Net income 18.1 $ 40.0 $ 57.5 $ 72.8 $ 91.3 $ 98.0 $ 160.0 $ 537.8 Depreciation 22.5 25.5 $ 30.0 $ 345 $ 40.5 46.5 52.5 252.0 Total 40.6 65.5 $ 87.5 $ 107.3 $ 131.8 144.5 212.5 $ 789.8 Uses: Capital expenditures Change in working capital 43.8 19.5 50.4 $ 57.5 $ 66.2 $ 68.5 $ 78.8 S 90.6 $ 455.7 22.4 25.8 $ 29.6 $ 34.0 44.3 Total 72.8 5 38.5 214.1 63.3 83.3 95.8 102.4 117.3 134.9 669.8 Excess cash/(borrowing needs) (22.7) $ (7.3) $ 4.2 $ 11.5 $ 29.4 $ 27.2 S 77.6 $ 120.0 Dividend 7.2 $ 16.0 $ 23.0 $ 29.1 $ 36.5 39.2 64.0 $ 215.1 After dividend Excess cash/(borrowing needs) $ (29.9) $ (23.3) $ (18.8) $ (17.6) $ (7.2) $ (12.0) $ 13.6 $ (95.1)