Synopsis and Objectives

In mid$-$September $2015,$ Sara Larson, the chief financial

officer $($CFO$)$ of a large computer$-$aided design and

manufacturing $(CA\frac{D}{C}AM$ equipment manufacturer needed to

decide whether to pay out dividends to the firm's shareholders or

to repurchase stock. If Larson chose to pay out dividends, she

would have to also decide upon the magnitude of the payout. A

secondary question was whether the firm should embark on a

campaign of corporate$-$image advertising and change its

corporate name to reflect its new outlook.

The case serves as a review of the many practical aspects of

the dividend and share buyback decisions, including $(1)$

signaling effects; $(2)$ clientele effects; and $(3)$ the finance and

investment implications of increasing dividend payouts and

share$-$repurchase decisions. This case serves to highlight

practical considerations when setting a firm's dividend policy.

Suggested Questions for Advance Assignment to Students

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 Rockboro's

management willing to vary, and which elements remain

fixed as a matter of the company's policy?

What happens to Rockboro'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 and assumes that the maximum debt

capacity is$,$ as a matter of policy, $40\%$ of the book value of

equity.

How might Rockboro's various providers of capital, such as

its stockholders and creditors, react if Rockboro declares a

dividend in $2015?$ What are the arguments for and against

the zero$-$payout, $40\%-$payout, and residual$-$payout policies?

What should Sara Larson recommend to the board of

directors with regard to a long$-$term dividend$-$payout policy

for Rockboro Machine Tools Corporation?

How might various providers of capital, such as

stockholders and creditors, react if Rockboro repurchased

its shares? Should Rockboro institute a share$-$buyback

plan?

Should Larson recommend the corporate$-$image advertising

campaign and corporate name change to Rockboro's

directors? Do the advertising and name change have any

bearing on the dividend policy or the stock$-$repurchase

policy that you propose?