Case 26 : GAINESBORO MACHINE TOOLS CORPORATION

Questions:

1. What are the problems here, and what do you recommend?

2. What are the implications of different payout levels for Gainesboro's capital structure and unused debt capacity?

3. What is the nature of the dividend decision that Swenson must make? What are the pros and cons of the alternative positions? (Or alternatively, Why pay any dividends?) How will Gainesboro's various providers of capital, such as its stockholders and bankers, react to a declaration of no dividend? What about the announcement of a 40% payout? How would they react to a residual payout?

4. What risks does the firm face?