In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock.

1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock. Which of those three elements is Gainesboro’s management willing to vary, and which elements remain fixed as a matter of the company’s policy?2. 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?Assume that maximum debt capacity is, as a matter of policy, 40% of the book value of equity.3. How might Gainesboro’s various providers of capital, such as its stockholders and creditors, react if Gainesboro declares a dividend in 2005? What are the arguments for and against the zero payout, 40% payout, and residual payout policies? What should Ashley Swenson recommend to the board of directors with regard to the long-term dividend payout policy for Gainesboro Machine Tools Corporation?4. How might various providers of capital, such as stockholders and creditors, react if Gainesboro repurchased its shares? Should Gainesboro do so?5. Should Swenson recommend the corporate-image advertising campaign and corporate name change to the Gainesboro’s directors? Do the advertising and name change have any bearing on the dividend policy or the stock repurchase policy that you propose?

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