Gainesboro Machine
Tools Corporation
In mid-September 2005, Ashley Swenson, chief financial officer (CFO) of Gainesboro
Machine Tools Corporation, paced the floor of her Minnesota office. She needed to
submit a recommendation to Gainesboro’s board of directors regarding the company’s
dividend policy, which had been the subject of an ongoing debate among the firm’s
senior managers. Compounding her problem was the uncertainty surrounding the
recent impact of Hurricane Katrina, which had caused untold destruction across the
southeastern United States. In the weeks after the storm, the stock market had spiraled
downward and, along with it, Gainesboro’s stock, which had fallen 18%, to $22.15. In
response to the market shock, a spate of companies had announced plans to buy back
stock. While some were motivated by a desire to signal confidence in their companies
as well as in the U.S. financial markets, still others had opportunistic reasons. Now,
Ashley Swenson’s dividend-decision problem was compounded by the dilemma of
whether to use company funds to pay shareholder dividends or to buy back stock.
Background on the Dividend Question
After years of traditionally strong earnings and predictable dividend growth, Gainesboro
had faltered in the past five years. In response, management implemented two extensive
restructuring programs, both of which were accompanied by net losses. For three years
in a row since 2000, dividends had exceeded earnings. Then, in 2003, dividends were
decreased to a level below earnings. Despite extraordinary losses in 2004, the board of
directors declared a small dividend. For the first two quarters of 2005, the board declared
no dividend. But in a special letter to shareholders, the board committed itself to
resuming payment of the dividend as soon as possible—ideally, sometime in 2005.
393
29
CASE
This case was written by Robert F. Bruner and Sean Carr, and is dedicated to Professors Robert F. Vandell
and Pearson Hunt, the authors of an antecedent case, long out of print, that provided the model for the
economic problem in this case. “Gainesboro” is a fictional firm, though it draws on dilemmas of contemporary
companies. The financial support of the Batten Institute is gratefully acknowledged. Copyright © 2005 by

the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies,
send an e-mail to No part of this publication may be reproduced,
stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic,
mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 393
In a related matter, senior management considered embarking on a campaign
of corporate-image advertising, together with changing the name of the corporation to
“Gainesboro Advanced Systems International, Inc.” Management believed that the name
change would help improve the investment community’s perception of the company.
Overall, management’s view was that Gainesboro was a resurgent company that
demonstrated great potential for growth and profitability. The restructurings had
revitalized the company’s operating divisions. In addition, the newly developed
machine tools designed on state-of-the-art computers showed signs of being well
received in the market, and promised to render the competitors’ products obsolete.
Many within the company viewed 2005 as the dawning of a new era, which, in spite
of the company’s recent performance, would turn Gainesboro into a growth stock. The
company had no Moody’s or Standard & Poor’s rating because it had no bonds out-
standing, but Value Line rated it an “A” company.
1
Out of this combination of a troubled past and a bright future arose Swenson’s
dilemma. Did the market view Gainesboro as a company on the wane, a blue-chip
stock, or a potential growth stock? How, if at all, could Gainesboro affect that per-
ception? Would a change of name help to positively frame investors’ views of the
firm? Did the company’s investors expect capital growth or steady dividends? Would
a stock buyback instead of a dividend affect investors’ perceptions of Gainesboro in
any way? And, if those questions could be answered, what were the implications for
Gainesboro’s future dividend policy?
The Company
Gainesboro Corporation was founded in 1923 in Concord, New Hampshire, by two
mechanical engineers, James Gaines and David Scarboro. The two men had gone to

school together and were disenchanted with their prospects as mechanics at a farm-
equipment manufacturer.
In its early years, Gainesboro had designed and manufactured a number of
machinery parts, including metal presses, dies, and molds. In the 1940s, the company’s
large manufacturing plant produced armored-vehicle and tank parts and miscellaneous
equipment for the war effort, including riveters and welders. After the war, the com-
pany concentrated on the production of industrial presses and molds, for plastics as well
as metals. By 1975, the company had developed a reputation as an innovative producer
of industrial machinery and machine tools.
In the early 1980s, Gainesboro entered the new field of computer-aided design and
computer-aided manufacturing (CAD/CAM). Working with a small software company,
it developed a line of presses that could manufacture metal parts by responding to com-
puter commands. Gainesboro merged the software company into its operations and,
over the next several years, perfected the CAM equipment. At the same time, it devel-
oped a superior line of CAD software and equipment that would allow an engineer to
394 Part Five Management of the Firm’s Equity: Dividends and Repurchases
1
Value Line’s financial-strength ratings, from Aϩϩ to C, were a measure of a company’s ability to withstand
adverse business conditions and were based on leverage, liquidity, business risk, company size, and stock-
price variability, as well as analysts’ judgments.
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 394
design a part to exacting specifications on a computer. The design could then be entered
into the company’s CAM equipment, and the parts could be manufactured without the
use of blueprints or human interference. By the end of 2004, CAD/CAM equipment
and software were responsible for about 45% of sales; presses, dies, and molds made
up 40% of sales; and miscellaneous machine tools were 15% of sales.
Most press and mold companies were small local or regional firms with limited
clientele. For that reason, Gainesboro stood out as a true industry leader. Within
the CAD/CAM industry, however, a number of larger firms, including Autodesk, Inc.,
Cadence Design, and Synopsys, Inc., competed for dominance of the growing market.

Throughout the 1990s, Gainesboro helped set the standard for CAD/CAM,
but the aggressive entry of large foreign firms into CAD/CAM and the rise of the U.S.
dollar dampened sales. In the late 1990s and early 2000s, technological advances and
aggressive venture capitalism fueled the entry of highly specialized, state-of-the-art
CAD/CAM firms. Gainesboro fell behind some of its competition in the development
of user-friendly software and the integration of design and manufacturing. As a result,
revenues slipped from a high of $911 million, in 1998, to $757 million, in 2004.
To combat the decline in revenues and to improve weak profit margins, Gainesboro
took a two-pronged approach. First, it devoted a greater share of its research-and-
development budget to CAD/CAM in an effort to reestablish its leadership in the field.
Second, the company underwent two massive restructurings. In 2002, it sold two
unprofitable lines of business with revenues of $51 million, sold two plants, eliminated
five leased facilities, and reduced personnel. Restructuring costs totaled $65 million.
Then, in 2004, the company began a second round of restructuring by altering its
manufacturing strategy, refocusing its sales and marketing approach, and adopting
administrative procedures that allowed for a further reduction in staff and facilities.
The total cost of the operational restructuring in 2004 was $89 million.
The company’s recent consolidated income statements and balance sheets are
provided in Exhibits 1 and 2. Although the two restructurings produced losses total-
ing $202 million in 2002 and 2004, by 2005 the restructurings and the increased
emphasis on CAD/CAM research appeared to have launched a turnaround. Not only
was the company leaner, but also the research led to the development of a system that
Gainesboro’s management believed would redefine the industry. Known as the Artifi-
cial Workforce, the system was an array of advanced control hardware, software, and
applications that could distribute information throughout a plant.
Essentially, the Artificial Workforce allowed an engineer to design a part on CAD
software and input the data into CAM equipment that could control the mixing of
chemicals or the molding of parts from any number of different materials on differ-
ent machines. The system could also assemble and can, box, or shrink-wrap the fin-
ished product. The Artificial Workforce ran on complex circuitry and highly advanced

software that allowed the machines to communicate with each other electronically.
Thus, a product could be designed, manufactured, and packaged solely by computer
no matter how intricate it was.
Gainesboro had developed applications of the product for the chemicals industry
and for the oil- and gas-refining industries in 2004 and, by the next year, it had created
applications for the trucking, automobile-parts, and airline industries.
Case 29 Gainesboro Machine Tools Corporation 395
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 395
By October 2004, when the first Artificial Workforce was shipped, Gainesboro
had orders totaling $75 million. By year end, the backlog was $100 million. The future
for the product looked bright. Several securities analysts were optimistic about the
product’s impact on the company. The following comments paraphrase their thoughts:
The Artificial Workforce products have compelling advantages over competing entries,
which will enable Gainesboro to increase its share of a market that, ignoring periodic
growth spurts, will expand at a real annual rate of about 5% over the next several years.
The company is producing the Artificial Workforce in a new automated facility,
which, when in full swing, will help restore margins to levels not seen in years.
The important question now is how quickly Gainesboro will be able to ship in volume.
Manufacturing mishaps and missing components delayed production growth through
May 2005, putting it about six months beyond the original target date. And start-up costs,
which were a significant factor in last year’s deficits, have continued to penalize earnings.
Our estimates assume that production will proceed smoothly from now on and that it will
approach the optimum level by year’s end.
Gainesboro’s management expected domestic revenues from the Artificial Workforce
series to total $90 million in 2005 and $150 million in 2006. Thereafter, growth in sales
would depend on the development of more system applications and the creation of system
improvements and add-on features. International sales through Gainesboro’s existing
offices in Frankfurt, Germany; London, England; Milan, Italy; and Paris, France; and
new offices in Hong Kong, China; Seoul, Korea; Manila, Philippines; and Tokyo, Japan,
were expected to provide additional revenues of $150 million by as early as 2007. Cur-

rently, international sales accounted for approximately 15% of total corporate revenues.
Two factors that could affect sales were of some concern to Gainesboro. First,
although the company had successfully patented several of the processes used by the
Artificial Workforce system, management had received hints through industry observers
that two strong competitors were developing comparable products and would probably
introduce them within the next 12 months. Second, sales of molds, presses, machine
tools, and CAD/CAM equipment and software were highly cyclical, and current pre-
dictions about the strength of the U.S. economy were not encouraging. As shown in
Exhibit 3, real GDP (gross domestic product) growth was expected to hover at a steady
but unimpressive 3.0% over the next few years. Industrial production, which had
improved significantly since 2001, would likely indicate a trend slightly downward next
year and the year after that. Despite the macroeconomic environment, Gainesboro’s
management remained optimistic about the company’s prospects because of the suc-
cessful introduction of the Artificial Workforce series.
Corporate Goals
A number of corporate objectives had grown out of the restructurings and recent tech-
nological advances. First and foremost, management wanted and expected the firm to
grow at an average annual compound rate of 15%. A great deal of corporate planning
had been devoted to that goal over the past three years and, indeed, second-quarter
396 Part Five Management of the Firm’s Equity: Dividends and Repurchases
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 396
financial data suggested that Gainesboro would achieve revenues of about $870 million
in 2005, as shown in Exhibit 1. If Gainesboro achieved a 15% compound rate of
growth through 2011, the company could reach $2.0 billion in sales and $160 million
in net income.
In order to achieve that growth goal, Gainesboro management proposed a strategy
relying on three key points. First, the mix of production would shift substantially.
CAD/CAM and peripheral products on the cutting edge of industrial technology would
account for three-quarters of sales, while the company’s traditional presses and molds
would account for the remainder. Second, the company would expand aggressively in

the international arena, whence it hoped to obtain half of its sales and profits by 2011.
This expansion would be achieved through opening new field sales offices around the
world. Third, the company would expand through joint ventures and acquisitions of
small software companies, which would provide half of the new products through
2011; in-house research would provide the other half.
The company had had an aversion to debt since its inception. Management believed
that small amounts of debt, primarily to meet working-capital needs, had their place,
but that anything beyond a 40% debt-to-equity ratio was, in the oft-quoted words of
Gainesboro cofounder David Scarboro, “unthinkable, indicative of sloppy management,
and flirting with trouble.” Senior management was aware that equity was typically
more costly than debt, but took great satisfaction in the company’s “doing it on its
own.” Gainesboro’s highest debt-to-capital ratio in the past 25 years (22%) had
occurred in 2004, and was still the subject of conversations among senior managers.
Although eleven members of the Gaines and the Scarboro families owned 13%
of the company’s stock and three were on the board of directors, management placed
the interests of the outside shareholders first. (Shareholder data are provided in
Exhibit 4.) Stephen Gaines, board chair and grandson of the cofounder, sought to
maximize growth in the market value of the company’s stock over time.
At 61, Gaines was actively involved in all aspects of the company’s growth. He
dealt fluently with a range of technical details of Gainesboro’s products, and was espe-
cially interested in finding ways to improve the company’s domestic market share.
His retirement was no more than four years away, and he wanted to leave a legacy
of corporate financial strength and technological achievement. The Artificial Work-
force, a project that he had taken under his wing four years earlier, was finally begin-
ning to bear fruit. Gaines now wanted to ensure that the firm would also soon be able
to pay a dividend to its shareholders.
Gaines took particular pride in selecting and developing promising young managers.
Ashley Swenson had a bachelor’s degree in electrical engineering and had been a sys-
tems analyst for Motorola before attending graduate school. She had been hired in 1995,
fresh out of a well-known MBA program. By 2004, she had risen to the position of CFO.

Dividend Policy
Gainesboro’s dividend and stock-price histories are presented in Exhibit 5. Before
1999, both earnings and dividends per share had grown at a relatively steady pace, but
Gainesboro’s troubles in the early 2000s had taken their toll on earnings. Consequently,
Case 29 Gainesboro Machine Tools Corporation 397
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 397
dividends were pared back in 2003 to $0.25 a share—the lowest dividend since 1990.
In 2004, the board of directors declared a payout of $0.25 a share, despite reporting
the largest per-share earnings loss in the firm’s history and despite, in effect, having to
borrow to pay that dividend. In the first two quarters of 2005, the directors did not
declare a dividend. In a special letter to shareholders, however, the directors declared
their intention to continue the annual payout later in 2005.
In August 2005, Swenson contemplated her choices from among the three possi-
ble dividend policies to decide which one she should recommend:
• Zero-dividend payout: This option could be justified in light of the firm’s strategic
emphasis on advanced technologies and CAD/CAM, and reflected the huge cash
requirements of such a move. The proponents of this policy argued that it would
signal that the firm now belonged in a class of high-growth and high-technology
firms. Some securities analysts wondered whether the market still considered
Gainesboro a traditional electrical-equipment manufacturer or a more technologi-
cally advanced CAD/CAM company. The latter category would imply that the
market expected strong capital appreciation, but perhaps little in the way of divi-
dends. Others cited Gainesboro’s recent performance problems. One questioned
the “wisdom of ignoring the financial statements in favor of acting like a blue
chip.” Was a high dividend in the long-term interests of the company and its
stockholders, or would the strategy backfire and make investors skittish?
Swenson recalled a recently published study that found that firms were dis-
playing a lower propensity to pay dividends. The study found that the percentage
of firms paying cash dividends had dropped from 66.5%, in 1978, to 20.8%, in
1999.

2
In that light, perhaps the market would react favorably, if Gainesboro
adopted a zero dividend-payout policy.
• 40% dividend payout or a dividend of around $0.20 a share: This option would
restore the firm to an implied annual dividend payment of $0.80 a share, the
highest since 2001. Proponents of this policy argued that such an announcement
was justified by expected increases in orders and sales. Gainesboro’s investment
banker suggested that the market might reward a strong dividend that would
bring the firm’s payout back in line with the 36% average within the electrical-
industrial-equipment industry and with the 26% average in the machine-tool
industry. Still others believed that it was important to send a strong signal to
shareholders, and that a large dividend (on the order of a 40% payout) would sug-
gest that the company had conquered its problems and that its directors were con-
fident of its future earnings. Supporters of this view argued that borrowing to pay
dividends was consistent with the behavior of most firms. Finally, some older
managers opined that a growth rate in the range of 10% to 20% should accompany
a dividend payout of between 30% and 50%.
• Residual-dividend payout: A few members of the finance department argued that
Gainesboro should pay dividends only after it had funded all the projects that
398 Part Five Management of the Firm’s Equity: Dividends and Repurchases
2
Eugene Fama and Kenneth French, “Changing Firm Characteristics or Lower Propensity to Pay,” Journal
of Financial Economics 60 (April 2001): 3–43.
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 398
offered positive net present values (NPV). Their view was that investors paid man-
agers to deploy their funds at returns better than they could otherwise achieve, and
that, by definition, such investments would yield positive NPVs. By deploying
funds into those projects and returning otherwise unused funds to investors in the
form of dividends, the firm would build trust with investors and be rewarded
through higher valuation multiples.

Another argument in support of that view was that the particular dividend
policy was “irrelevant” in a growing firm: any dividend paid today would be
offset by dilution at some future date by the issuance of shares needed to make
up for the dividend. This argument reflected the theory of dividends in a perfect
market advanced by two finance professors, Merton Miller and Franco Modigliani.
3
To Ashley Swenson, the main disadvantage of this policy was that dividend pay-
ments would be unpredictable. In some years, dividends could even be cut to zero,
possibly imposing negative pressure on the firm’s share price. Swenson was all
too aware of Gainesboro’s own share-price collapse following its dividend cut.
She recalled a study by another finance professor, John Lintner,
4
which found that
firms’ dividend payments tended to be “sticky” upward—that is, dividends would
rise over time and rarely fall, and that mature, slower-growth firms paid higher
dividends, while high-growth firms paid lower dividends.
In response to the internal debate, Swenson’s staff pulled together Exhibits 6
and 7, which present comparative information on companies in three industries—
CAD/CAM, machine tools, and electrical-industrial equipment—and a sample of
high- and low-payout companies. To test the feasibility of a 40% dividend-payout rate,
Swenson developed the projected sources-and-uses of cash statement provided in
Exhibit 8. She took the boldest approach by assuming that the company would grow
at a 15% compound rate, that margins would improve over the next few years to his-
torical levels, and that the firm would pay a dividend of 40% of earnings every year.
In particular, the forecast assumed that the firm’s net margin would hover between
4% and 6% over the next six years, and then increase to 8% in 2011. The firm’s oper-
ating executives believed that this increase in profitability was consistent with
economies of scale to be achieved upon the attainment of higher operating output
through the Artificial Workforce series.
Image Advertising and Name Change

As part of a general review of the firm’s standing in the financial markets, Gainesboro’s
director of Investor Relations, Cathy Williams, had concluded that investors misper-
ceived the firm’s prospects and that the firm’s current name was more consistent with
its historical product mix and markets than with those projected for the future.
Case 29 Gainesboro Machine Tools Corporation 399
3
M. H. Miller and F. Modigliani, “Dividend Policy, Growth, and the Valuation of Shares,” Journal of
Business 34 (October 1961): 411–433.
4
J. Lintner, “Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes,”
American Economic Review 46 (May 1956): 97–113.
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 399
Williams commissioned surveys of readers of financial magazines, which revealed a
relatively low awareness of Gainesboro and its business. Surveys of stockbrokers
revealed a higher awareness of the firm, but a low or mediocre outlook on Gainesboro’s
likely returns to shareholders and its growth prospects. Williams retained a consulting
firm that recommended a program of corporate-image advertising targeted toward
guiding the opinions of institutional and individual investors. The objective was to
enhance the firm’s visibility and image. Through focus groups, the image consultants
identified a new name that appeared to suggest the firm’s promising new strategy:
Gainesboro Advanced Systems International, Inc. Williams estimated that the image-
advertising campaign and name change would cost approximately $10 million.
Stephen Gaines was mildly skeptical. He said, “Do you mean to raise our stock
price by ‘marketing’ our shares? This is a novel approach. Can you sell claims on a
company the way Procter & Gamble markets soap?” The consultants could give no
empirical evidence that stock prices responded positively to corporate-image cam-
paigns or name changes, though they did offer some favorable anecdotes.
Conclusion
Swenson was in a difficult position. Board members and management disagreed on
the very nature of Gainesboro’s future. Some managers saw the company as entering

a new stage of rapid growth and thought that a large (or, in the minds of some, any)
dividend would be inappropriate. Others thought that it was important to make a
strong public gesture showing that management believed that Gainesboro had turned
the corner and was about to return to the levels of growth and profitability seen in the
1980s and ’90s. This action could only be accomplished through a dividend. Then
there was the confounding question about the stock buyback. Should Gainesboro use
its funds to repurchase stocks instead of paying out a dividend? As Swenson wrestled
with the different points of view, she wondered whether Gainesboro’s management
might be representative of the company’s shareholders. Did the majority of public
shareholders own stock for the same reason, or were their reasons just as diverse as
those of management?
400 Part Five Management of the Firm’s Equity: Dividends and Repurchases
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 400
Case 29 Gainesboro Machine Tools Corporation 401
EXHIBIT 1 | Consolidated Income Statements (dollars in thousands, except per-share data)
For the Years Ended December 31
Projected
2002 2003 2004 2005
Net sales $858,263 $815,979 $756,638 $870,000
Cost of sales 540,747 501,458 498,879 549,750
Gross profit 317,516 314,522 257,759 320,250
Research & development 77,678 70,545 75,417 77,250
Selling, general, & administrative 229,971 223,634 231,008 211,500
Restructuring costs 65,448 0 89,411 0
Operating profit (loss) (55,581) 20,343 (138,077) 31,500
Other income (expense) (4,500) 1,065 (3,458) (4,200)
Income (loss) before taxes (60,081) 21,408 (141,534) 27,300
Income taxes (benefit) 1,241 8,415 (750) 9,282
Net income (loss) ($61,322) $ 12,993 ($140,784) $ 18,018
Earnings (loss) per share ($3.25) $ 0.69 ($7.57) $ 0.98

Dividends per share $ 0.77 $ 0.25 $ 0.25 $ 0.39
Note: The dividends in 2005 assume a payout ratio of 40%.
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 401
402 Part Five Management of the Firm’s Equity: Dividends and Repurchases
EXHIBIT 2 | Consolidated Balance Sheets (dollars in thousands)
For the Years Ended
December 31
Projected
2003 2004 2005
Cash & equivalents $ 13,917 $ 22,230 $ 25,665
Accounts receivable 208,541 187,235 217,510
Inventories 230,342 203,888 217,221
Prepaid expenses 14,259 13,016 15,011
Other 22,184 20,714 21,000
Total current assets 489,242 447,082 496,407
Property, plant, & equipment 327,603 358,841 410,988
Less depreciation 167,414 183,486 205,530
Net property, plant, & equipment 160,190 175,355 205,458
Intangible assets 9,429 2,099 1,515
Other assets 15,723 17,688 17,969
Total assets $674,583 $642,223 $721,350
Bank loans $ 34,196 $ 71,345 $ 74,981
Accounts payable 36,449 34,239 37,527
Current portion of long-term debt 300 150 1,515
Accruals and other 129,374 161,633 183,014
Total current liabilities 200,318 267,367 297,037
Deferred taxes 16,986 13,769 16,526
Long-term debt 9,000 8,775 30,021
Deferred pension costs 44,790 64,329 70,134
Other liabilities 2,318 5,444 7,505

Total liabilities 273,411 359,683 421,224
Common stock, $1 par value 18,855 18,855 18,835
Capital in excess of par 107,874 107,907 107,889
Cumulative translation adjustment (6,566) 20,208 26,990
Retained earnings 291,498 146,065 156,875
Less treasury stock at cost:
1990–256,151; 1991–255,506 (10,490) (10,494) (10,464)
Total shareholders’ equity 401,172 282,541 300,126
Total liabilities & equity $674,583 $642,223 $721,350
Note: Projections assume a dividend-payout ratio of 40%.
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 402
Case 29 Gainesboro Machine Tools Corporation 403
EXHIBIT 3 | Economic Indicators and Projections (all numbers are percentages)
Projected
2001 2002 2003 2004 2005 2006 2007
Three-month Treasury bill rate (at auction) 3.4 1.6 1.0 1.4 3.2 4.2 4.7
Ten-year Treasury note yield 5.0 4.6 4.0 4.3 4.3 4.8 5.7
AAA corporate bond rate 7.1 6.5 5.7 5.6 5.3 5.9 6.8
Percentage change in:
Real gross domestic product 0.8 1.9 3.0 4.3 3.3 2.9 3.2
Producer prices, finished goods 2.0 (1.3) 3.2 3.5 1.2 (0.2) 0.1
Industrial production (3.4) (0.6) 0.3 4.5 3.7 3.4 4.8
Consumption of durable goods 4.3 6.5 7.4 6.0 2.4 4.2 4.5
Consumer spending 2.5 3.1 3.3 3.5 2.9 2.9 2.8
GDP deflator 2.4 1.7 1.8 2.1 1.9 1.7 1.9
Sources of data:
Value Line Investment Survey,
26 August 2005;
U.S. Economic Outlook,
Global Insight, September 2004

.
EXHIBIT 4 | Comparative Stockholder Data, 1994 and 2004 (in thousands of shares)
1994 2004
Shares Percentage Shares Percentage
Founders’ families 2,390 13% 2,421 13%
Employees and families 3,677 20% 3,155 17%
Institutional investors
Growth-oriented 2,390 13% 1,138 6%
Value-oriented 1,471 8% 2,421 13%
Individual investors
Long-term retirement 6,803 37% 4,806 26%
Short-term; trading-oriented 919 5% 2,421 13%
Other; unknown 735 4% 2,239 12%
Total 18,385 100% 18,600 100%
Note: The investor-relations department identified these categories from company records. The type of institutional investor was
identified from promotional materials stating the investment goals of the institutions. The type of individual investor was identified
from a survey of subsamples of investors.
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 403
404
EXHIBIT 5 | Per-Share Financial and Stock Data
1
Stock Price
Shares
Sales/ Avg. Payout Avg. Outstanding
Year Share EPS
2
DPS
2
CPS
2

High Low Avg. P/E Ratio Yield (millions)
1989 $14.52 $0.45 $0.18 $0.97 $20.37 $9.69 $14.48 32.4 40% 1.2% 15.49
1990 16.00 0.74 0.22 1.29 21.11 10.18 14.85 20.2 30% 1.5% 15.58
1991 22.25 0.89 0.27 1.43 21.23 8.20 13.50 15.1 30% 2.0% 16.04
1992 25.64 1.59 0.31 2.05 18.50 10.18 13.35 8.4 19% 2.3% 17.87
1993 27.19 2.29 0.40 2.83 22.48 12.17 18.36 8.0 17% 2.2% 18.08
1994 30.06 2.59 0.57 3.25 23.84 18.01 21.00 8.1 22% 2.7% 18.39
1995 31.66 2.61 0.72 3.34 26.70 18.25 22.73 8.7 27% 3.1% 18.76
1996 37.71 2.69 0.81 3.60 29.43 19.50 24.23 9.0 30% 3.4% 18.76
1997 40.69 2.56 0.86 3.62 39.74 20.12 29.48 11.5 34% 2.9% 18.78
1998 48.23 3.58 0.92 4.81 40.98 27.32 33.98 9.5 26% 2.7% 18.88
1999 43.59 2.79 1.03 4.25 38.74 21.36 31.82 11.4 37% 3.2% 18.66
2000 42.87 0.65 1.03 2.23 47.19 29.55 36.81 57.0 160% 2.8% 18.66
2001 41.48 0.35 1.03 2.00 40.23 26.82 31.26 89.9 297% 3.3% 18.66
2002 45.52 (3.25) 0.77 2.86 30.75 22.13 26.45 nmf nmf 2.9% 18.85
2003 43.28 0.69 0.25 1.99 71.88 50.74 61.33 88.2 35% 0.4% 18.85
2004 $40.68 ($7.57) $0.25 ($0.97) $39.88 $18.38 $29.15 nmf nmf 0.9% 18.60
nmf ϭ not a meaningful figure.
1
Adjusted for a 3-for-2 stock split in January 1995 and a 50% stock dividend in June 1997.
2
EPS: earnings per share; CPS: cash earnings per share; DPS: dividend per share.
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 404
Case 29 Gainesboro Machine Tools Corporation 405
EXHIBIT 6 | Comparative Industry Data, August 2005
Annual Growth
Rate of Cash
Flow (%)
Current Current Debt/ Insider
Sales Last 5 Next 3–5 Payout Dividend Equity Ownership P/E

($mm) Years Years Ratio (%) Yield (%) (%)
1
(%) Ratio (x)
Gainesboro Machine Tools Corp. 504 (1.5) 15.0 0.0 0.0 28.0 30.0 nmf
CAD/CAM companies
(software and hardware)
Autodesk, Inc. 1,234 4.5 10.5 6.0 0.3 0.0 3.2 25.3
Ansys, Inc. 135 16.5 13.0 0.0 0.0 0.0 4.4 23.3
Cadence Design 1,198 (1.5) 6.0 0.0 0.0 24.7 3.5 21.4
Intergraph Corp. 551 (8.0) 12.0 0.0 0.0 0.2 3.1 25.7
Mentor Graphics 711 4.5 2.0 0.0 0.0 65.5 5.9 21.9
Moldflow Corp. 49 nmf 11.5 0.0 0.0 0.0 15.4 36.2
Parametric Technology Corp. 660 (6.5) 6.0 0.0 0.0 0.0 5.4 33.4
Synopsys, Inc. 1,092 6.5 6.0 0.0 0.0 0.0 5.6 26.5
Electrical-industrial
equipment manufacturers
Cooper Industries, Inc. 4,463 1.5 3.0 39.0 2.4 30.6 1.0 16.4
Emerson Electric Company 15,615 2.5 3.5 54.0 2.6 43.3 0.8 20.5
Hubbell Inc. 1,993 5.0 6.0 52.0 3.0 21.1 2.9 17.6
Thomas & Betts Corp. 1,516 (10.0) 5.0 0.0 0.0 60.2 2.4 17.7
Machine tool manufacturers
Actuant Corp. 976 (21.5) 12.5 0.0 0.0 180.8 5.9 19.1
Lincoln Electric Holdings, Inc. 1,334 2.5 10.0 32.0 2.2 28.4 5.2 15.0
Milacron, Inc. 774 (15.5) (2.5) 0.0 0.0 468.1 4.6 nmf
Snap-on Inc. 2,407 5.0 3.5 71.0 3.1 18.3 3.0 22.9
nmf ϭ not a meaningful figure.
1
Based on book values.
Source of data:
Value Line Investment Survey,

August 2005.
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 405
406
EXHIBIT 7 | Selected Healthy Companies with High and Zero Dividend-Payouts, August 2005
Expected Expected Expected
Return on Growth Rate Current Current Growth Rate Current
Total Capital of Dividends Dividend Dividend of Sales P/E
Industry (next 3–5 years) (next 3–5 years) Payout Yield (next 3–5 years) Ratio
High-Payout Companies
Crescent Real Estate Equities Co. Real estate investment trust 5.0 nmf 123.0 8.9 nmf 12.4
Equity Office Properties Trust Real estate investment trust 5.5 nmf 96.6 7.2 nmf nmf
Frontline, Ltd. Oil transport 20.0 9.0 115.0 35.3 (5.0) 3.2
Scudder High Income Trust Investment management nmf nmf 96.4 9.2 nmf nmf
TEPPCO Partners, LP Pipeline operations 12.0 3.5 104.0 6.7 5.0 24.3
UIL Holdings Electric utility 4.5 0.0 112.0 6.0 5.5 18.7
Zero-Payout Companies
Amgen Inc. Biotechnology 17.5 0.0 0.0 0.0 18.5 26.5
Cisco Systems, Inc. Network systems 49.0 0.0 0.0 0.0 16.0 21.6
Coach, Inc. Luxury retail 22.5 0.0 0.0 0.0 20.5 25.8
eBay Inc. Internet auction 26.0 0.0 0.0 0.0 32.0 74.7
Oracle Corporation Software 31.0 0.0 0.0 0.0 14.5 17.9
Research in Motion Limited Telecommunications 13.5 0.0 0.0 0.0 30.0 nmf
Yahoo! Inc. Internet/media 14.5 0.0 0.0 0.0 31.0 nmf
Source of data:
Value Line Investment Survey,
August 2005.
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 406
EXHIBIT 8 | Projected Sources-and-Uses Statement Assuming a 40% Payout Ratio
1
(dollars in millions)

Total
Projections:
2005 2006 2007 2008 2009 2010 2011 2005–11
Sales $870.1 $1,000.7 $1,150.8 $1,323.4 $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 $ 34.5 $ 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 $ 43.8 $ 50.4 $ 57.5 $ 66.2 $ 68.5 $ 78.8 $ 90.6 $ 455.7
Change in working capital $ 19.5 $ 22.4 $ 25.8 $ 29.6 $ 34.0 $ 38.5 $ 44.3 $ 214.1
Total $ 63.3 $ 72.8 $ 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 $ 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)
Note: Dividend calculated as 40% of net income.
1
This analysis ignores the effects of borrowing on interest and amortization. It includes all increases in long-term liabilities and equity items other than retained earnings.
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%
407
bru6171X_case29_391-408.qxd 12/8/12 11:57 AM Page 407