Eastboro Machine Tools Corporation

Essay by cases675University, Master's March 2005

download word file, 7 pages ( 18 KB ) 2.0

STATEMENT OF THE PROBLEM

Although this case presents several different issues to consider, the underlying problem is the correct implementation of Eastboro's dividend policy. Eastboro was founded as a manufacturer of machine parts, and has traditionally paid a fairly substantial dividend. However, in recent years, the core focus of the company has shifted toward technology in the fields of computer-aided design and manufacturing, highlighted by its latest development, Artificial Workforce.

This shift in the focus of Eastboro has brought about some financial changes as well. With revenues falling, they have missed two quarters' worth of dividend payments, and have promised to try to begin repayment of them by the end of 2001. However, to do this, they may need to borrow money, not only in 2001, but in the next several years. Eastboro has always been debt averse, so this is an unsettling prospect for them. There are several options being discussed, such as a zero-dividend payout, a 40% payout, and a residual payout policy.

This major issue, as well as what direction the firm is going, and whether that corresponds to the wishes of current shareholders are the main issues needing to be addressed by Ms. Campbell.

FACTS

Current dividend policy = 40%

Attacks on World Trade Center and Pentagon occurred one week prior

Stock has fallen 18% since attacks

Firm has committed itself to resuming dividend payout, presumably in 2001

Potential name change to Eastboro Advanced Systems International, Inc.

Rated as an "A" company by Value Line

Recent decline in net revenues and profit margins

Future international growth is expected

Involved in high cyclical environment

GDP expected to fall from 4% to 1.6%

Largest % of individual investors are focused on retirement needs

Largest % of institutional investors are value-oriented

Management expects growth of 15%

CAD/CAM and...