Rockboro Machine Tools Corporation Finance Case Study Solution

Rockboro Machine Tools Corporation

Case Questions

• What happens to Rockboro’s excess cash (or borrowing need), debt/equity ratio, and unused debt capacity if:
  • No dividends are paid?
  • A 20% payout is pursued?
  • A 40% payout is pursued?
  • A residual dividend payout policy is pursued?
• What risks does the firm face? Comment on the nature of the industry, strategy of the firm, and firm’s performance. Also consider the impact of a decline in sales growth and net income as percentage of sales on excess cash (or borrowing need) and unused debt capacity (Here, you can again use Exhibit 8. You can consider 12% as sales growth and net income as percentage of sales one percent less than the original model. Also try different assumptions of sales growth and profit margin and evaluate the impact on excess cash (or borrowing need) and unused debt capacity. Please summarize your findings in a table).
• What are the arguments for and against 0% payout, 20% payout, 40% payout, and residual dividend payout policies?
• How might Rockboro’s various providers of capital react to a change in payout policy? (Here carefully look at Exhibit 4 and try to predict how different shareholders might react to changes in payout policy (i.e., clientele effect). Also discuss how creditors might react)
• What should Sara Larson recommend to the board of directors with regard to a long-term dividend payout policy for Rockboro? Explain.
• Should Rockboro institute a stock repurchase plan? How might shareholders and creditors react to such a plan? Explain.
• Should Larson recommend the corporate image advertising campaign and corporate name change to the board of directors? Would the image campaign significantly affect the implementation of the payout policy?

Rockboro Machine Tools Corporation

Note: I have posted the exhibits in the case as a spreadsheet on Blackboard. The last exhibit (Exhibit 8) is actually an excel model. You can change the assumptions in the model to answer the questions above. Please prepare a summary table of your findings.

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