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?

5. What is the nature of the share repurchase decision that Swenson must make? How would this affect the dividend decision?

6. Does the stock market appear to reward high-dividend payout? What about low-dividend payout? Does it matter what type of investor owns the shares? What is the impact on share price of dividend policy?

7. What should Swenson recommend?

In mid-September 2005, Ashley Swenson, the chief financial officer (CFO) of a large computer-aided design and computer-aided manufacturing (CAD/CAM) equipment manufacturer needed to decide whether to pay out dividends to the firm’s shareholders, or to repurchase stock. If Swenson chose to pay out dividends, she would have to also decide upon the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising, and change its corporate name to reflect its new outlook.