Eastboro Machine Tools Corporation Essay

Our main concern with Eastboro is their verit able-bodied divid abolish policy. With their up-to-date 40% dividend payout ratio, they go out have to continue to borrow money to pay their dividend until the end of 2006. In 2007, they finally examine an surplus of hard cash later the dividend. With this present-day(prenominal) ratio, Eastboros hope to expand more than in the international commercialise is very restrained. Since management does not like to take on debt, they theoretically wont expand until 2007. However, with the recent restructuring of the gild and recommendation of a name turn, we feel that the dividend policy needs a make-over, as well. direction wants to guidance their energy to moving the image of the company to more of a branch company as opposed to a high dividend remunerative mature company.To obtain this image, the dividend payout ratio needs to be lowered drastically to a payout ratio of 10%. With this decrease in the payout, the new Eastboro advanced Systems International (EASI) ordain convince sh atomic function 18holders of their interchange to a growth company. transformation to a 10% payout ratio allows Eastboro to see excess cash by 2004, rather than 2007 with the current ratio, giving them the ability to fund the international growth sooner. This pull up stakes also attract new investors, which in the short-term will offset the expected loss of some current sh atomic number 18holders. We feel that this change will back up increase the value of the company and the upside will, in the future, outweigh the downside.The thought process behind reducing the payout to 10% is that EASI will be able toconsistently reach this target. At the end of each year, after all projects have been funded, EASI will be able to give up a limited dividend to shareholders. With this ability, Eastboro will not have a problem retaining the shareholders or obtaining new shareholders.The recent attack on September 11, 2001 has caused the market to see some low results. Since the stock price has fallen from $30 to $22.15, this would be a good opportunity for EASI to repurchase some stock to help increase the value to the shareholders. Repurchasing some stock at this point will signal to shareholders that management feels strongly about the restructuring of the company. This, also, will give the shareholders the pledge to remain with the company.RECOMMENDATIONSWe recommend that Eastboro change their name to Eastboro Advanced Systems International, Inc. to introduce the company as heading in the new direction of becoming a more technology advanced company. We also recommend reducing the dividend payout to 10%, as well as the repurchase of stock at the current price to help increase value. This will reduce the companys dependency on borrowed funds, reducing the forecasted loss of the company and making them more profitable in shorter term period.This will give them increased cash flows to reinvest in CAD/CAM rese arch to keep the company on the leading(a) edge of advancement of their Artificial Workforce and related products at radical and abroad. Along with the change in company dividend payout policy, a statement should be issued to inform the stockholders of the companys direction and the continued importance to remediate the companys CAD/CAM products. To maximize shareholder wealth, we will be sticking to a 10% dividend in the future with the possibility of special dividends. With these changes, Eastboro will be signaling their focus on becoming a high growth stock.CRITIQUEOverall group five did a very good telephone line addressing the major issues in thiscase. They tackled the issues of the dividend policy, the proposed name change for Eastboro, and whether or not to buy back shares of stock.We agree with much of their summary and recommendations. By lowering the dividend policy to 15%, they are allowing a bigger portion of funds to be used for future research and development, an idea we agree with. By cutting this percentage back from a current rate of 40%, there will simply be a reaction by both current and prospective stockholders. By affirmatory the name change to Eastboro Advanced Systems International, they are signaling to the street that they are committed to future growth, and will no longer be able to be relied upon for high dividend payouts. We also like the fact that they did a dividend valuation, demonstrate that Eastboro is currently under-valued, and does have a strong future.The only major issue we have with their analysis is a couple mistakes in the information they used. In reporting net income for 2001 in their forecasts for potential dividend payouts, they used 8. The correct number here, as given by the text, is 18. Also, they used the wrong depreciation data in several years in this forecast. These mistakes would have been realized if they had reviewed their design adequately. These mistakes skew the numbers enough to mislead reade rs, showing the wrong timeframe for excess cash.In conclusion, group five did a very good job on the major issues in this case. However, they should have taken more time reviewing some of their data to ensure accuracy.LIMITATIONSThere are several limitations in this case. One of the main issues is what kind of fallout will be produced by the cutting of the dividend payout from the current rate of 40% to a rate of 10%. We are assuming that those who are currently holding the stock for these whacking dividend payments will either stay with Eastboro, or will be replaced by new investors whose goals better represent Eastboros vision.We are also soothsaying all numbers with an assumed growth rate of 15%, which obviously has the possibility, if not the probability of fluctuating below or above this number. Also, we are assuming the recent focus on the CAD/CAM technology will be profitable for Eastboro in the long-run, and that this new vision will realize value for shareholders.Lastly, we are assuming that the market as a strong will perceive this move for what it is, a change in focus for a solid company with high potential for future growth. An preference would be that people would look at the cut in dividends for a company who had historically paid them as a signal of weakness for Eastboro. Were going with the assumption that the name change, as well as proper marketing practices by Eastboro should adequately address this problem.