Eastboro Machine Tools Corporation Essay

Our chief concern with Eastboro is their current dividend policy. With their current 40 % dividend payout ratio. they will hold to go on to borrow money to pay their dividend until the terminal of 2006. In 2007. they eventually see an surplus of hard currency after the dividend. With this current ratio. Eastboro’s hope to spread out more in the international market is really restrained. Since direction does non wish to take on debt they theoretically won’t expand until 2007. However, with the recent restructuring of the company and recommendation of a name alteration we feel that the dividend policy needs a make-over, as good. Management wants to concentrate their energy to traveling the image of the company to more of a growing company as opposed to a high dividend paying mature company.

To obtain this image. the dividend payout ratio needs to be lowered drastically to a payout ratio of 10 % . With this lessening in the payout. the new Eastboro Advanced Systems International ( EASI ) will convert stockholders of their alteration to a growing company. Switch overing to a 10 % payout ratio allows Eastboro to see extra hard currency by 2004. instead than 2007 with the current ratio. giving them the ability to fund the international growing Oklahoman. This will besides pull new investors. which in the short-run will countervail the expected loss of some current stockholders. We feel that this alteration will assist increase the value of the company and the top will in the hereafter outweigh the downside.

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The thought behind cut downing the payout to 10 % is that EASI will be able to systematically make this mark. At the terminal of each twelvemonth. after all undertakings have been funded. EASI will be able to publish a particular dividend to stockholders. With this ability. Eastboro will non hold a job retaining the stockholders or obtaining new stockholders.

The recent onslaught on September 11. 2001 has caused the market to see some low consequences. Since the stock monetary value has fallen from $ 30 to $ 22. 15. this would be a good chance for EASI to buy back some stock to assist increase the value to the stockholders. Buy backing some stock at this point will signal to stockholders that direction feels strongly about the restructuring of the company. This. besides. will give the stockholders the assurance to stay with the company.


We recommend that Eastboro change their name to Eastboro Advanced Systems International. Inc. to present the company as header in the new way of going a more engineering advanced company. We besides recommend cut downing the dividend payout to 10 % every bit good as the redemption of stock at the current monetary value to assist increase value. This will cut down the company’s dependence on borrowed financess. cut downing the forecasted loss of the company and doing them more profitable in shorter clip period.

This will give them increased hard currency flows to reinvest in CAD/CAM research to maintain the company on the taking border of promotion of their Artificial Workforce and related merchandises at place and abroad. Along with the alteration in company dividend payout policy a statement should be issued to inform the shareholders of the company’s way and the continued importance to better the company’s CAD/CAM merchandises. To maximise stockholder wealth. we will be lodging to a 10 % dividend in the hereafter with the possibility of particular dividends. With these alterations. Eastboro will be signaling their focal point on going a high growing stock.


Overall group five did a really good occupation turn toing the major issues in this instance. They tackled the issues of the dividend policy. the proposed name alteration for Eastboro. and whether or non to purchase back portions of stock.

We agree with much of their analysis and recommendations. By take downing the dividend policy to 15 % they are leting a larger part of financess to be used for future research and development. an thought we agree with. By cutting this per centum back from a current rate of 40 % there will evidently be a reaction by both current and prospective shareholders. By O.K.ing the name alteration to Eastboro Advanced Systems International. they are signaling to the street that they are committed to future growing. and will no longer be able to be relied upon for high dividend payouts. We besides like the fact that they did a dividend rating. demoing that Eastboro is presently under-valued and does hold a strong hereafter.

The lone major issue we have with their analysis is a couple errors in the information they used. In describing net income for 2001 in their prognosiss for possible dividend payouts. they used 8. The right figure here as given by the text is 18. Besides. they used the incorrect depreciation informations in several old ages in this prognosis. These errors would hold been realized if they had reviewed their brief adequately. These errors skew the Numberss plenty to misdirect readers. demoing the incorrect timeframe for extra hard currency.

In decision. group five did a really good occupation on the major issues in this instance. However. they should hold taken more clip reexamining some of their informations to guarantee truth.


There are several restrictions in this instance. One of the chief issues is what sort of radioactive dust will be produced by the film editing of the dividend payout from the current rate of 40 % to a rate of 10 %. We are presuming that those who are presently keeping the stock for these big dividend payments will either remain with Eastboro. or will be replaced by new investors whose ends better represent Eastboro’s vision.

We are besides calculating all Numberss with an false growing rate of 15 % . which evidently has the possibility if non the chance of fluctuating below or above this figure. Besides we are presuming the recent focal point on the CAD/CAM engineering will be profitable for Eastboro in the long-run. and that this new vision will make value for stockholders.

Last. we are presuming that the market as a whole will comprehend this move for what it is. a alteration in focal point for a solid company with high potency for future growing. An option would be that people would look at the cut in dividends for a company who had historically paid them as a signal of failing for Eastboro. We’re traveling with the premise that the name alteration every bit good as proper selling patterns by Eastboro should adequately turn to this job.


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