OverviewIn mid-September 2005, Ashley Swenson, the chief financial officer of this major CAD/CAM equipment manufacturer, must decide whether to pay dividends to the company's shareholders or buy back shares. If Swenson chooses to pay dividends, it must also decide how much to pay. A subsidiary question is whether the company should embark on a corporate image advertising campaign and change its corporate name to reflect its new outlook. The case serves to examine the many practical aspects of dividend and stock repurchase decisions, including (1) signaling effects, (2) clientele effects, and (3) financial and investment implications of l increase in dividend payments and share buyback decisions. Listed are the various issues Gainesboro is currently facing. Problems are listed randomly and in no order of importance.1. Investor Relations:2. Dividend Policy: Gainesboro shall choose an adequate policy with respect to its dividend policy, which neither compromises its ability to generate future profits nor affects its relationship with its large dividend-dependent stockholder.3. Capital Structure: Debt and Equity Dividend Policy One of the misconceptions in Gainesboro is the belief that only by paying dividends will the company be able to make a strong public gesture indicating that the company has reached the milestone and is on track to achieve levels of growth and profitability. Growing companies generally do not pay dividends, as profits are typically reinvested in the business to drive growth and fund various projects and operating assets. Although Gainesboro is not a standard growth company, its management and recent activities seem to suggest that the company is poised to...... middle of paper ...... accurately reflects intrinsic value of the company from the shareholders' point of view. point of view and their expectations regarding future profits. The continuing value of residual profits was determined by taking the projected residual profits for 2010 and multiplying them by 1 plus the growth in residual profits from 2009 to 2010, then dividing this figure by the difference between the cost of equity and residual growth. Based on the projected net operating assets and revenue figures given in the case (see Exhibit 5), the value per share of Gainesboro based on residual earnings is $19.06. This figure is well below the average price at which Gainesboro shares traded in 2004 ($29.15) and suggests that Gainesboro is still overvalued. This model supports the valuation given by the discounted cash flows if dividends must be taken into account and paid..