Rockboro Machine Tools Corporation
Case Questions
1. What happens to Rockboro’s excess cash (or borrowing need), debt/equity ratio, and
unused debt capacity if:
a. No dividends are paid?
b. A 20% payout is pursued?
c. A 40% payout is pursued?
d. A residual dividend payout policy is pursued?
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.
2. 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).
3. What are the arguments for and against 0% payout, 20% payout, 40% payout, and
residual dividend payout policies?
4. 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)
5. What should Sara Larson recommend to the board of directors with regard to a long-term
dividend payout policy for Rockboro? Explain.
6. Should Rockboro institute a stock repurchase plan? How might shareholders and
creditors react to such a plan? Explain.
7. 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?
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Rev. Mar. 28, 2017
Rockboro Machine Tools Corporation
On September 15, 2015, Sara Larson, CFO of Rockboro Machine Tools Corporation (Rockboro), paced
the floor of her Minnesota office. She needed to submit a recommendation to Rockboro’s board of directors
regarding the company’s dividend policy, which had been the subject of an ongoing debate among the firm’s
senior managers. Larson knew that the board was optimistic about Rockboro’s future, but there was a lingering
uncertainty regarding the company’s competitive position. Like many companies following the “great
recession” of 2008 and 2009, Rockboro had succeeded in recovering revenues back to prerecession levels.
Unlike most other companies, however, Rockboro had not been able to recover its profit margins, and without
a much-improved cost structure, it would be difficult for Rockboro to compete with the rising presence of
foreign competition that had surfaced primarily from Asia. The board’s optimism was fueled by the signs that
the two recent restructurings would likely return Rockboro to competitive profit margins and allow the
company to compete for its share of the global computer-aided design and manufacturing (CAD/CAM)
market.
There were two issues that complicated Larson’s dividend policy recommendation. First, she had to
consider that over the past four years Rockboro shareholders had watched their investment return them no
capital gain (i.e., the current stock price of $15.25 was exactly the same as it had been on September 15, 2011).
The only return shareholders had received was dividends, which amounted to an average annual return of 2.9%
and compared poorly to an annual return of 12.9% earned by the average stock over the same period.1 The
second complication was that the 2008 recession had prompted a number of companies to repurchase shares
either in lieu of or in addition to paying a dividend. A share repurchase was considered a method for
management and the board to signal confidence in their company and was usually greeted with a stock price
increase when announced. Rockboro had repurchased $15.8 million of shares in 2009, but had not used share
buybacks since then. Larson recognized, therefore, that her recommendation needed to include whether to use
company funds to buy back stock, pay dividends, do both, or do neither.
Background on the Dividend Question
Prior to the recession of 2008, Rockboro had enjoyed years of consistent earnings and predictable dividend
growth. As the financial crisis was unfolding, Rockboro’s board decided to maintain a steady dividend and to
postpone any dividend increases until Rockboro’s future became more certain. That policy had proven to be
expensive since earnings recovered much more slowly than was hoped and dividend payout rose above 50%
for the years 2009 through 2011. To address the profit-margin issue, management implemented two extensive
restructuring programs, both of which were accompanied by net losses. Dividends were maintained at
1
The average stock performance was measured by the performance of the S&P 500 index.
This case was written by Kenneth M. Eades, Professor of Business Administration, drawing from earlier versions by Robert F. Bruner, University
Professor, Distinguished Professor of Business Administration, and Dean Emeritus, and Professors Robert F. Vandell, and Pearson Hunt. Copyright ©
2016 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
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$0.64/share until the second restructuring in 2014, when dividends were reduced by half for the year. For the
first two quarters of 2015, the board declared no dividend. But in a special letter to shareholders, the board
committed itself to resuming payment of the dividend “as soon as possible—ideally, sometime in 2015.”
In a related matter, senior management considered embarking on a campaign of corporate-image
advertising, together with changing the name of the corporation to “Rockboro Advanced Systems International,
Inc.” Management believed that the name change would help improve the investment community’s perception
of the company. Overall, management’s view was that Rockboro was a resurgent company that demonstrated
great potential for growth and profitability. The restructurings had revitalized the company’s operating
divisions. In addition, a newly developed software product promised to move the company beyond its machinetool business into licensing of its state-of-the-art design software that provided significant efficiencies for users
and was being well received in the market, with expectations of rendering many of the competitors’ products
obsolete. Many within the company viewed 2015 as the dawning of a new era, which, in spite of the company’s
recent performance, would turn Rockboro into a growth stock.
Out of this combination of a troubled past and a bright future arose Larson’s dilemma. Did the market
view Rockboro as a company on the wane, a blue-chip stock, or a potential growth stock? How, if at all, could
Rockboro affect that perception? Would a change of name help to positively frame investors’ views of the firm?
Did the company’s investors expect capital growth or steady dividends? Would a stock buyback affect investors’
perceptions of Rockboro in any way? And, if those questions could be answered, what were the implications
for Rockboro’s future dividend policy?
The Company
Rockboro was founded in 1923 in Concord, New Hampshire, by two mechanical engineers, James
Rockman and David Pittsboro. The two men had gone to school together and were disenchanted with their
prospects as mechanics at a farm-equipment manufacturer.
In its early years, Rockboro had designed and manufactured a number of machinery parts, including metal
presses, dies, and molds. In the 1940s, the company’s large manufacturing plant produced armored-vehicle and
tank parts and miscellaneous equipment for the war effort, including riveters and welders. After the war, the
company concentrated on the production of industrial presses and molds, for plastics as well as metals. By
1975, the company had developed a reputation as an innovative producer of industrial machinery and machine
tools.
In the early 1980s, Rockboro entered the new field of computer-aided design and computer-aided
manufacturing (CAD/CAM). Working with a small software company, it developed a line of presses that could
manufacture metal parts by responding to computer commands. Rockboro merged the software company into
its operations and, over the next several years, perfected the CAM equipment. At the same time, it developed
a superior line of CAD software and equipment that allowed an engineer to design a part to exacting
specifications on a computer. The design could then be entered into the company’s CAM equipment, and the
parts could be manufactured without the use of blueprints or human interference. By the end of 2014,
CAD/CAM equipment and software were responsible for about 45% of sales; presses, dies, and molds made
up 40% of sales; and miscellaneous machine tools were 15% of sales.
Most press-and-mold companies were small local or regional firms with a limited clientele. For that reason,
Rockboro stood out as a true industry leader. Within the CAD/CAM industry, however, a number of larger
firms, including Autodesk, Inc., Cadence Design, and Synopsys, Inc., competed for dominance of the growing
market.
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Throughout the 1990s and into the first decade of the 2000s, Rockboro helped set the standard for
CAD/CAM, but the aggressive entry of large foreign firms into CAD/CAM had dampened sales.
Technological advances and significant investments had fueled the entry of highly specialized, state-of-the-art
CAD/CAM firms. By 2009, Rockboro had fallen behind its competition in the development of user-friendly
software and the integration of design and manufacturing. As a result, revenues had barely recovered beyond
the prerecession-level high of $1.07 billion in 2008, to $1.13 billion in 2014, and profit margins were getting
compressed because the company was having difficulty containing costs.
To combat the weak profit margins, Rockboro took a two-pronged approach. First, a much larger share of
the research-and-development budget was devoted to CAD/CAM, in an effort to reestablish Rockboro’s
leadership in the field. Second, the company underwent two massive restructurings. In 2012, it sold three
unprofitable business lines and two plants, eliminated five leased facilities, and reduced personnel. Restructuring
costs totaled $98 million. Then, in 2014, the company began a second round of restructuring by refocusing its
sales and marketing approach and adopting administrative procedures that allowed for a further reduction in
staff and facilities. The total cost of the operational restructuring in 2014 was $134 million.
The company’s recent financial statements (Exhibits 1 and 2) revealed that although the restructurings
produced losses totaling $303 million, the projected results for 2015 suggested that the restructurings and the
increased emphasis on new product development had launched a turnaround. Not only was the company
becoming leaner, but also the investment in research and development had led to a breakthrough in Rockboro’s
CAD/CAM software that management believed would redefine the industry. Known as the Artificial
Intelligence Workforce (AIW), the system was an array of advanced control hardware, software, and
applications that continuously distributed and coordinated information throughout a plant. Essentially, AIW
allowed an engineer to design a part on CAD software and input the data into CAM equipment that controlled
the mixing of chemicals or the molding of parts from any number of different materials on different machines.
The system could also assemble and can, box, or shrink-wrap the finished product. As part of the licensing
agreements for the software, Rockboro engineers provided consulting to specifically adapt the software to each
client’s needs. Thus, regardless of its complexity, a product could be designed, manufactured, and packaged
solely by computer. Most importantly, however, Rockboro’s software used simulations to test new product
designs prior to production. This capability was enhanced by the software’s capability to improve the design
based on statistical inferences drawn from Rockboro’s large proprietary database.
Rockboro had developed AIW applications for the chemicals industry and for the oil- and gas-refining
industries in 2014 and, by the next year, it would complete applications for the trucking, automobile-parts, and
airline industries. By October 2014, when the first AIW system was shipped, Rockboro had orders totaling
$115 million. By year-end 2014, the backlog had grown to $150 million. The future for the product looked
bright. Several securities analysts were optimistic about the product’s impact on the company. The following
comments paraphrase their thoughts:
The Artificial Intelligence Workforce system has compelling advantages over competing entries, which
will enable Rockboro to increase its share of a market that, ignoring periodic growth spurts, will expand
at a real annual rate of about 5% over the next several years.
Rockboro’s engineering team is producing the AIW applications at an impressive rate, which will help
restore margins to levels not seen in years.
The important question now is how quickly Rockboro will be able to sell licenses in volume. Start-up
costs, which were a significant factor in last year’s deficits, have continued to penalize earnings. Our
estimates assume that adoption rates will proceed smoothly from now on and that AIW will have
gained significant market share by year-end 2016.
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Rockboro’s management expected domestic revenues from the Artificial Intelligence Workforce series to
total $135 million in 2015 and $225 million in 2016. Thereafter, growth in sales would depend on the
development of more system applications and the creation of system improvements and add-on features.
International sales through Rockboro’s existing offices in Frankfurt, London, Milan, and Paris and new offices
in Hong Kong, Shanghai, Seoul, Manila, and Tokyo were expected to help meet foreign competition head on
and to provide additional revenues of $225 million by as early as 2017. Currently, international sales accounted
for approximately 15% of total corporate revenues.
Two factors that could affect sales were of some concern to management. First, although Rockboro had
successfully patented several of the processes used by the AIW system, management had received hints through
industry observers that two strong competitors were developing comparable systems and would probably
introduce them within the next 12 months. Second, sales of molds, presses, machine tools, and CAD/CAM
equipment and software were highly cyclical, and current predictions about the strength of the United States
and other major economies were not encouraging. As shown in Exhibit 3, real GDP (gross domestic product)
growth was expected to expand to 2.9% by 2016, and industrial production, which had improved significantly
for 2014 to 4.2% growth, was projected to decline in 2015 before recovering to 3.6% by 2016. Despite the
lukewarm macroeconomic environment, Rockboro’s management remained optimistic about the company’s
prospects because of the successful introduction of the AIW series.
Corporate Goals
A number of corporate objectives had grown out of the restructurings and recent technological advances.
First and foremost, management wanted and expected revenues to grow at an average annual compound rate
of 15%. With the improved cost structure, profit growth was expected to exceed top-line growth. A great deal
of corporate planning had been devoted to the growth goal over the past three years and, indeed, secondquarter financial data suggested that Rockboro would achieve revenues of about $1.3 billion in 2015. If
Rockboro achieved a 15% compound rate of revenue growth through 2021, the company would reach
$3.0 billion in sales and $196 million in net income (Exhibit 8).
In order to achieve their growth objective, Rockboro management proposed a strategy relying on three key
points. First, the mix of production would shift substantially. CAD/CAM with emphasis on the AIW system
would account for three-quarters of sales, while the company’s traditional presses and molds would account
for the remainder. Second, the company would expand aggressively in the global markets, where it hoped to
obtain half of its sales and profits by 2021. This expansion would be achieved through opening new field sales
offices around the world, including Hong Kong, Shanghai, Seoul, Manila, and Tokyo. Third, the company
would expand through joint ventures and acquisitions of small software companies, which would provide half
of the new products through 2021; in-house research would provide the other half.
The company had had an aversion to debt since its inception. Management believed that a small amount
of debt, primarily to meet working-capital needs, had its place, but anything beyond a 40% debt-to-equity ratio
was, in the oft-quoted words of Rockboro cofounder David Pittsboro, “unthinkable, indicative of sloppy
management, and flirting with trouble.” Senior management was aware that equity was typically more costly
than debt, but took great satisfaction in the company “doing it on its own.” Rockboro’s highest debt-to-capital
ratio in the past 25 years (28%) had occurred in 2014 and was still the subject of conversations among senior
managers.
Although 11 members of the Rockman and the Pittsboro families owned 13% of the company’s stock and
three were on the board of directors, management placed the interests of the outside shareholders first
(Exhibit 4). Stephen Rockman, board chair and grandson of the cofounder, sought to maximize growth in the
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market value of the company’s stock over time. At 61, Rockman was actively involved in all aspects of the
company’s growth. He dealt fluently with a range of technical details of Rockboro’s products and was especially
interested in finding ways to improve the company’s domestic market share. His retirement was no more than
four years away, and he wanted to leave a legacy of corporate financial strength and technological achievement.
The Artificial Workforce, a project that he had taken under his wing four years earlier, was finally beginning to
bear fruit. Rockman now wanted to ensure that the firm would also soon be able to pay a dividend to its
shareholders.
Rockman took particular pride in selecting and developing promising young managers. Sara Larson had a
bachelor’s degree in electrical engineering and had been a systems analyst for Motorola before attending
graduate school. She had been hired in 2005, fresh out of a well-known MBA program. By 2014, she had risen
to the position of CFO.
Dividend Policy
Before 2009, Rockboro’s earnings and dividends per share had grown at a relatively steady pace
(Exhibit 5). Following the recession, cost-control problems became apparent because earnings were not able
to rebound to prerecession levels. The board maintained dividends at $0.64 per year until 2014 when the
restructuring expenses led to the largest per-share earnings loss in the firm’s history. To conserve cash, the
board voted to pare back dividends by 50% to $0.32 a share—the lowest dividend since 1998. Paying any
dividend with such high losses effectively meant that Rockboro had to borrow to pay the dividend. In response
to the financial pressure, the directors elected to not declare a dividend for the first two quarters of 2015. In a
special letter to shareholders, however, the directors declared their intention to continue the annual payout later
in 2015.
In August 2015, Larson was considering three possible dividend policies to recommend:
Zero-dividend payout: A zero payout could be justified in light of the firm’s strategic emphasis on advanced
technologies and CAD/CAM, which demanded huge cash requirements to succeed. The proponents
of this policy argued that it would signal that the firm now belonged in a class of high-growth and hightechnology firms. Some securities analysts wondered whether the market still considered Rockboro a
traditional electrical-equipment manufacturer or a more technologically advanced CAD/CAM
company. The latter category would imply that the market expected strong capital appreciation, but
perhaps little in the way of dividends. Others cited Rockboro’s recent performance problems. One
questioned the “wisdom of ignoring the financial statements in favor of acting like a blue chip.” Was
a high dividend in the long-term interests of the company and its stockholders, or would the strategy
backfire and make investors skittish?
40% dividend payout or a quarterly dividend of around $0.10 a share: This option would restore the firm to an
implied annual dividend payment of $0.40 a share, higher than 2014’s dividend of $0.32, but still less
than the $0.64 dividend paid in 2013. Proponents of this policy argued that such an announcement
was justified by expected increases in orders and sales. Rockboro’s investment banker suggested that
the stock market would reward a strong dividend that would bring the firm’s payout back in line with
the 40% average within the electrical-industrial-equipment industry. Some directors agreed and argued
that it was important to send a strong signal to shareholders, and that a large dividend (on the order of
a 40% payout) would suggest that the company had conquered its problems and that its directors were
confident of its future earnings. Finally, some older directors opined that a growth rate in the range of
10% to 20% should accompany a dividend payout of between 30% and 50%, but not all supported the
idea of borrowing to fuel the growth and support that level of dividend.
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Larson recalled a recently published study reporting that firms had increased their payout ratios to an
average of 38% for Q2 2015, from a low of 27% in Q1 2011. Also, the trend since the recession was
for more companies to pay dividends. For the S&P 500, about 360 companies paid dividends in Q1
2010 compared to 418 in Q2 2015.2 Viewed in that light, perhaps the market would expect Rockboro
to follow the crowd and would react negatively if Rockboro did not reinstitute a positive dividendpayout policy.
Residual-dividend payout: A few members of the finance department argued that Rockboro should pay
dividends only after it had funded all the projects that offered positive net present values (NPV). Their
view was that investors paid managers to deploy their funds at returns better than they could otherwise
achieve, and that, by definition, such investments would yield positive NPVs. By deploying funds into
those projects and returning otherwise unused funds to investors in the form of dividends, the firm
would build trust with investors and be rewarded through higher valuation multiples.
Another argument in support of that view was that the particular dividend policy was “irrelevant” in a
growing firm: any dividend paid today would be offset by dilution at some future date by the issuance
of shares needed to make up for the dividend. This argument reflected the theory of dividends in a
perfect market advanced by two finance professors, Merton Miller and Franco Modigliani.3 To Sara
Larson, the main disadvantage of this policy was that dividend payments would be unpredictable. In
some years, dividends could even be cut to zero, possibly imposing negative pressure on the firm’s
share price. Larson was all too aware of Rockboro’s own share-price collapse following its dividend
cut. She recalled a study by another finance professor, John Lintner,4 which found that firms’ dividend
payments tended to be “sticky” upward—that is, dividends would rise over time and rarely fall, and
that mature, slower-growth firms paid higher dividends, while high-growth firms paid lower dividends.
In response to the internal debate, Larson’s staff pulled together comparative information on companies
in three industries—CAD/CAM, machine tools, and electrical-industrial equipment—and a sample of highand low-payout companies (Exhibits 6 and 7). To test the feasibility of a 40% dividend-payout rate, Larson
developed a projected sources-and-uses-of-cash statement (Exhibit 8). She took an optimistic approach by
assuming that the company would grow at a 15% compound rate, that margins would improve steadily, and
that the firm would pay a dividend of 40% of earnings every year. In particular, the forecast assumed that the
firm’s net margin would gradually improve from 4.0% in 2015 to 6.5% in 2020 and 2021. The firm’s operating
executives believed that this increase in profitability was consistent with economies of scale and the higher
margins associated with the Artificial Intelligence Workforce series.
Image Advertising and Name Change
As part of a general review of the firm’s standing in the financial markets, Rockboro’s director of investor
relations, Maureen Williams, had concluded that investors misperceived the firm’s prospects and that the firm’s
current name was more consistent with its historical product mix and markets than with those projected for
the future. Williams commissioned surveys of readers of financial magazines, which revealed a relatively low
awareness of Rockboro and its business. Surveys of stockbrokers revealed a higher awareness of the firm, but
a low or mediocre outlook on Rockboro’s likely returns to shareholders and its growth prospects. Williams
retained a consulting firm that recommended a program of corporate-image advertising targeted toward guiding
2
Birstingl,
Andrew,
“Aggregate
Dividend
Payments
Continue
to
Rise
in
Q2.”
Factset,
Sept.
28,
2015,
http://www.factset.com/websitefiles/PDFs/dividend/dividend_9.28.15 (accessed Nov. 1, 2016).
3 Merton H. Miller and Franco Modigliani, “Dividend Policy, Growth, and the Valuation of Shares,” Journal of Business 34 (October 1961): 411–433.
4 J. Lintner, “Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes,” American Economic Review 46 (May 1956):
97–113.
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the opinions of institutional and individual investors. The objective was to enhance the firm’s visibility and
image. Through focus groups, the image consultants identified a new name that appeared to suggest the firm’s
promising new strategy: Rockboro Advanced Systems International, Inc. Williams estimated that the imageadvertising campaign and name change would cost approximately $15 million.
Stephen Rockman was mildly skeptical. He said, “Do you mean to raise our stock price by ‘marketing’ our
shares? This is a novel approach. Can you sell claims on a company the way Procter & Gamble markets soap?”
The consultants could give no empirical evidence that stock prices responded positively to corporate-image
campaigns or name changes, though they did offer some favorable anecdotes.
Conclusion
Larson was in a difficult position. Board members and management disagreed on the very nature of
Rockboro’s future. Some managers saw the company as entering a new stage of rapid growth and thought that
a large (or, in the minds of some, any) dividend would be inappropriate. Others thought that it was important
to make a strong public gesture showing that management believed that Rockboro had turned the corner and
was about to return to the levels of growth and profitability seen prior to the last five to six years. This action
could only be accomplished through a dividend. Then there was the confounding question about the stock
buyback. Should Rockboro use its funds to repurchase stocks instead of paying out a dividend? As Larson
wrestled with the different points of view, she wondered whether Rockboro’s management might be
representative of the company’s shareholders. Did the majority of public shareholders own stock for the same
reason, or were their reasons just as diverse as those of management?
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Exhibit 1
Rockboro Machine Tools Corporation
Consolidated Income Statements
(dollars in thousands, except per-share data)
2012
Net sales
Cost of sales
Gross profit
$1,287,394
811,121
476,273
2013
$1,223,969
752,186
471,782
2014
$1,134,956
748,319
386,638
Projected
2015
$1,305,000
824,625
480,375
Research & development
Selling, general, & administrative
Restructuring costs
Operating profit (loss)
116,516
344,957
98,172
(83,372)
105,818
335,450
0
30,515
113,126
346,511
134,116
(207,115)
115,875
317,250
0
47,250
Other income (expense)
Income (loss) before taxes
Income taxes (benefit)
Net income (loss)
(6,750)
(90,122)
1,861
($91,982)
1,598
32,112
12,623
$19,490
(5,186)
(212,301)
(1,125)
($211,176)
(6,300)
40,950
13,923
$27,027
($3.25)
$0.64
$0.69
$0.64
($7.57)
$0.32
Earnings (loss) per share
Dividends per share
$0.98
$0.39
Note: The dividends in 2015 assume a payout ratio of 40%.
Source: Author estimates.
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Exhibit 2
Rockboro Machine Tools Corporation
Consolidated Balance Sheets
(dollars in thousands)
Cash & equivalents
Accounts receivable
Inventories
Prepaid expenses
Other
Total current assets
$
Property, plant, & equipment
Less depreciation
Net property, plant, & equipment
Intangible assets
Other assets
Total assets
Bank loans
Accounts payable
Current portion of long-term debt
Accruals and other
Total current liabilities
2013
2014
Projected
2015
20,876 $
312,812
345,513
21,389
33,276
733,865
33,345 $
280,853
305,832
19,524
31,071
670,625
38,498
326,265
325,832
22,517
31,500
744,611
491,405
251,121
240,284
14,144
23,585
538,262
275,229
263,033
3,149
26,532
616,482
308,295
308,187
2,273
26,954
963,338
$ 1,082,024
$ 1,011,876
51,294 $
54,674
450
194,061
300,479
107,018 $
51,359
225
242,450
401,051
112,472
56,291
2,273
274,521
445,556
Deferred taxes
Long-term debt
Deferred pension costs
Other liabilities
Total liabilities
25,479
13,500
67,185
3,477
410,120
20,654
13,163
96,488
8,166
539,520
24,789
45,032
105,240
11,258
631,874
Common stock, $1 par value
Capital in excess of par
Cumulative translation adjustment
Retained earnings
Less treasury stock at cost:
Total shareholders’ equity
28,283
161,811
(9,849)
437,247
(15,735)
601,757
28,283
161,861
30,312
219,098
(15,735)
423,818
28,253
161,834
40,485
235,313
(15,735)
450,149
Total liabilities & equity
$
$
$ 1,011,876
$
963,338
$ 1,082,022
Note: Projections assume a dividend-payout ratio of 40%.
Source: Author estimates.
This document is authorized for use only by MICHAEL ADHANOM in Financial Policy Fall2018-1 taught by MINE ERTUGRUL, University of Massachusetts - Boston from Aug 2018 to Feb
2019.
For the exclusive use of M. ADHANOM, 2018.
Page 10
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Exhibit 3
Rockboro Machine Tools Corporation
Economic Indicators and Projections
(all numbers are percentages)
Three-month Treasury bill rate
10-year Treasury note yield
AAA corporate bond rate
2011
0.1%
2.8%
4.6%
2012
0.1%
1.8%
3.7%
2013
0.1%
2.4%
4.2%
2014
0.1%
2.5%
4.2%
Projected
2015
0.3%
2.2%
3.8%
Percent change in:
Real gross domestic product
Industrial production
Consumer price index
1.6%
3.3%
3.1%
2.3%
3.8%
2.1%
2.2%
2.9%
1.5%
2.4%
4.2%
1.6%
2.3%
0.5%
0.3%
2016
1.2%
2.9%
4.6%
2.9%
3.6%
2.2%
Data source: “Value Line Investment Survey,” August 2015.
This document is authorized for use only by MICHAEL ADHANOM in Financial Policy Fall2018-1 taught by MINE ERTUGRUL, University of Massachusetts - Boston from Aug 2018 to Feb
2019.
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Page 11
UV7227
Exhibit 4
Rockboro Machine Tools Corporation
Comparative Stockholder Data, 2004 and 2014
(in thousands of shares)
Shares
Founders’ families
Employees and families
Institutional investors
Growth oriented
Value oriented
Individual investors
Long term; retirement
Short term; trading oriented
Other; unknown
Total
2004
Percentage
Shares
2014
Percentage
3,585
5,516
13%
20%
5,113
4,443
18%
16%
3,585
2,207
13%
8%
1,602
3,409
6%
12%
10,205
1,379
1,103
37%
5%
4%
6,767
3,409
3,153
24%
12%
11%
27,578
100%
27,896
100%
Note: The investor-relations department identified these categories from company records. The type of institutional investor was
identified from promotional materials stating the investment goals of the institutions. The type of individual investor was identified
from a survey of subsamples of investors.
Source: Author estimates.
This document is authorized for use only by MICHAEL ADHANOM in Financial Policy Fall2018-1 taught by MINE ERTUGRUL, University of Massachusetts - Boston from Aug 2018 to Feb
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Page 12
High
EPS = earnings per share; CPS = cash earnings per share; DPS = dividend per share.
Source: Author estimates.
Low
Stock price
Avg.
2.03 $ 21.11 $ 10.18 $ 14.85
2.14
21.23
8.20
13.50
1.17
18.50
10.18
13.35
1.65
22.48
12.17
18.36
2.13
23.84
18.01
21.00
2.86
26.70
18.25
22.73
3.75
34.34
22.75
30.31
4.22
44.13
32.66
38.29
4.41
46.73
20.81
36.58
1.52
33.00
15.52
25.07
1.92
20.31
14.16
17.03
2.04
18.42
13.36
16.27
2.86
16.82
12.74
14.50
1.99
13.30
9.28
11.26
(0.97)
14.03
11.85
13.00
CPS
2
Adjusted for a 3-for-2 stock split in January 1995 and a 50% stock dividend in June 2007.
0.37 $
0.39
0.40
0.42
0.45
0.47
0.51
0.59
0.64
0.64
0.64
0.64
0.64
0.64
0.32
DPS
2
2
1.19 $
1.28
0.45
0.86
1.27
1.90
2.67
3.07
3.24
0.75
1.03
1.29
(3.25)
0.69
(7.57)
EPS
2
1
nmf = not a meaningful figure.
16.12 $
15.00
15.23
16.37
21.08
24.93
30.10
34.59
37.80
26.61
31.82
41.94
45.49
43.25
40.68
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
$
share
Year
Sales/
Per-Share Financial and Stock Data1
Rockboro Machine Tools Corporation
Exhibit 5
12.5
10.5
29.8
21.4
16.5
11.9
11.3
12.5
11.3
33.5
16.5
12.6
nmf
16.4
nmf
P/E
Avg.
31%
30%
88%
48%
35%
25%
19%
19%
20%
86%
62%
50%
nmf
93%
nmf
ratio
Payout
2.5%
2.9%
3.0%
2.3%
2.1%
2.1%
1.7%
1.5%
1.7%
2.6%
3.8%
3.9%
4.4%
5.7%
2.5%
yield
23.4
24.1
26.8
27.1
27.6
28.0
28.1
28.2
28.3
28.0
28.1
28.1
28.3
28.3
27.9
(millions)
Shares
Avg. outstanding
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2,512
941
1,702
1,244
1,357
2,058
22,304
3,359
6,624
1,400
2,813
1,211
3,278
CAD/CAM companies (software and hardware)
Autodesk, Inc.
Ansys, Inc.
Cadence Design
Mentor Graphics
PTC
Synopsys, Inc.
Electrical-industrial equipment manufacturers
Emerson Electric Company
Hubbell Inc.
Rockwell Auto
Machine tool manufacturers
Actuant Corp.
Lincoln Electric Holdings, Inc.
Milacron, Inc.
Snap-On Inc.
Data source: “Value Line Investment Survey,” February 2016.
Based on book values.
2%
24%
0%
26%
47%
37%
39%
0%
0%
0%
0%
0%
0%
nmf
Current
payout
ratio (%)
Rockboro cash flow growth calculations use an adjusted cash flow for 2014 that omits the restructuring costs.
5.5%
3.5%
nmf
8.5%
3.5%
6.0%
5.5%
10.5%
6.5%
10.0%
4.0%
4.5%
7.5%
15.0%
Next 3-5
years
2
6.0%
11.5%
nmf
9.5%
3.5%
7.5%
12.5%
3.0%
14.5%
0.0%
43.0%
8.5%
11.0%
−1.5%
Last 5
years
1
nmf = not a meaningful figure.
1,135
Rockboro Machine Tools Corp.
Sales
($millions)
cash flow (%)1
Annual growth rate of
Comparative Industry Data
Rockboro Machine Tools Corporation
Exhibit 6
0.1%
1%
0%
2%
3%
2%
2%
0%
0%
0%
0%
0%
0%
0%
38.5%
0.2%
265.1%
39.1%
52.8%
31.0%
34.1%
33.7%
0.0%
26.1%
18.1%
68.7%
1.5%
28.4%
Current
Debt/
dividend
yield (%) equity(%)2
3.7%
3.3%
0.0%
3.4%
0.8%
1.3%
1.5%
1.0%
1.9%
3.2%
2.6%
1.4%
1.4%
34.3%
Insider
ownership (%)
19.2
18.3
nmf
16.8
17.6
21.3
19.9
nmf
23.0
17.6
16.9
26.4
15.4
nmf
P/E
ratio
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2019.
Rockboro Machine Tools Corporation
Exhibit 7
1
38.5%
21.0%
27.5%
27.0%
26.5%
15.0%
8.0%
5.5%
6.5%
10.5%
7.5%
13.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
1.0%
3.0%
3.0%
11.0%
14.5%
6.0%
Expected growth
rate of dividends
(next 3-5 years)
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
212.1%
86.4%
75.1%
46.0%
43.1%
73.8%
Current
dividend
payout
A master limited partnership (MLP) paid no corporate taxes. All income taxes were paid by shareholders on their share of taxable earnings.
Auto parts
Fried chicken fast food
Supply chain IT
Biotechnology
Entertainment radio
Online retail
Oil/gas pipeline—MLP
Telecommunications utility
Electric utility
Chemical manufacturing
Auto manufacturer
Pharmaceutical
Industry
Expected return
on total capital
(next 3-5 years)
Selected Healthy Companies with High- and Zero-Dividend Payouts
Data source: “Value Line Investment Survey,” August 2015.
1
Zero-Payout Companies
AutoZone
Popeyes
Manhatttan Assoc
Biogen
Sirius XM
Amazon.com, Inc.
Suburban Propane
CenturyLink, Inc.
Southern Company
Dow Chemical
Ford Motor Co.
High-Payout Companies
Pfizer
Page 14
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
8.2%
6.7%
4.8%
4.6%
4.1%
3.6%
Current
dividend
yield
12.8%
14.5%
10.0%
14.0%
8.5%
17.5%
1.5%
3.0%
3.5%
7.0%
2.5%
1.5%
Expected growth
rate of sales
(next 3-5 years)
19.7
28.8
50.1
16.6
26.4
nmf
24.5
12.8
16.5
12.4
8.3
21.1
Current
P/E
ratio
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Page 15
(33.6)
10.8
($44.4)
Excess cash/(borrowing needs)
Dividend
After dividend
Excess cash/(borrowing needs)
This analysis ignores the effects of borrowing on interest expense.
65.3
29.3
94.5
Uses:
Capital expend.
Change in working capital
Total
Source: Author estimates.
1
27.0
33.9
61.0
$1,305
2015
15%
2.1%
40.0%
2015
Sources:
Net income
Depreciation
Total
Sales
Projections
Sales Growth Rate:
Net Income as % of Sales
Dividend Payout Ratio
Assumptions:
($33.6)
(9.6)
24.0
75.0
33.6
108.7
60.0
39.0
99.1
$1,501
2016
15%
4.0%
40.0%
2016
($28.3)
6.2
34.5
86.3
38.7
125.0
86.3
44.9
131.2
$1,726
2017
15%
5.0%
40.0%
2017
($26.6)
17.1
43.7
99.3
44.5
143.7
109.2
51.6
160.8
$1,985
2018
15%
5.5%
40.0%
2018
Projected Sources-and-Uses Statement
Assuming a 40% Payout Ratio1
(dollars in millions)
Rockboro Machine Tools Corporation
Exhibit 8
($12.3)
42.4
54.8
102.7
51.2
153.9
137.0
59.4
196.3
$2,283
2019
15%
6.0%
40.0%
2019
($6.3)
61.9
68.3
118.1
58.8
177.0
170.6
68.3
238.9
$2,625
2020
15%
6.5%
40.0%
2020
($7.3)
71.2
78.5
135.9
67.7
203.5
196.2
78.5
274.7
$3,019
2021
15%
6.5%
40.0%
2021
($158.9)
155.7
314.6
682.6
323.7
1,006.3
786.4
375.6
1,161.9
$14,444
Total
2015–21
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2019.
Exhibit 1
Rockboro Machine Tools Corporation
Consolidated Income Statements (in thousands of dollars, except per-share data)
Projected
2015
2012
2013
2014
$1.287.394
811.121
476.273
$1.223.969
752.186
471.782
$1.134.956
748.319
386.638
$1.305.000
824.625
480.375
Research & development
Selling, general, & administrative
Restructuring costs
Operating profit (loss)
116.516
344.957
98.172
(83.372)
105.818
335.450
0
30.515
113.126
346.511
134.116
(207.115)
115.875
317.250
0
47.250
Other income (expense)
Income (loss) before taxes
Income taxes (benefit)
Net income (loss)
(6.750)
(90.122)
1.861
($91.982)
1.598
32.112
12.623
$19.490
(5.186)
(212.301)
(1.125)
($211.176)
(6.300)
40.950
13.923
$27.027
($3,25)
$0,64
$0,69
$0,64
($7,57)
$0,32
$0,98
$0,39
Net sales
Cost of sales
Gross profit
Earnings (loss) per share
Dividends per share
Note: A dividend payout ratio of 40% is assumed for 2015.
Source: Author estimates.
Exhibit 2
Rockboro Machine Tools Corporation
Consolidated Balance Sheets (in thousands of dollars)
2013
Cash & equivalents
Accounts receivable
Inventories
Prepaid expenses
Other
$
Total current assets
Property, plant, & equipment
Less depreciation
Net property, plant, & equipment
Intangible assets
Other assets
Total assets
2014
20.876 $
312.812
345.513
21.389
33.276
33.345
280.853
305.832
19.524
31.071
733.865
670.625
491.405
251.121
240.284
14.144
23.585
538.262
275.229
263.033
3.149
26.532
$
963.338
51.294 $
54.674
450
194.061
300.479
107.018
51.359
225
242.450
401.051
Deferred taxes
Long-term debt
Deferred pension costs
Other liabilities
Total liabilities
25.479
13.500
67.185
3.477
410.120
20.654
13.163
96.488
8.166
539.520
Common stock, $1 par value
Capital in excess of par
Cumulative translation adjustment
Retained earnings
Less treasury stock at cost:
Total shareholders’ equity
28.283
161.811
(9.849)
437.247
(15.735)
601.757
28.283
161.861
30.312
219.098
(15.735)
423.818
Bank loans
Accounts payable
Current portion of long-term debt
Accruals and other
Total current liabilities
Total liabilities & equity
$ 1.011.876
$
$ 1.011.876
$
963.338
Note: Projections assume a dividend-payout ratio of 40%.
Source: Author estimates.
Projected
2015
$
38.498
326.265
325.832
22.517
31.500
744.611
616.482
308.295
308.187
2.273
26.954
$ 1.082.024
$
112.472
56.291
2.273
274.521
445.556
24.789
45.032
105.240
11.258
631.874
28.253
161.834
40.485
235.313
(15.735)
450.149
$ 1.082.022
Exhibit 3
Rockboro Machine Tools Corporation
Economic Indicators and Projections
(all figures are percentages)
Three-month Treasury bill rate
10-year Treasury note yield
AAA corporate bond rate
2011
0,1%
2,8%
4,6%
2012
0,1%
1,8%
3,7%
2013
0,1%
2,4%
4,2%
2014
0,1%
2,5%
4,2%
Projected
2015
2016
0,3%
1,2%
2,2%
2,9%
3,8%
4,6%
Percent change in:
Real gross domestic product
Industrial production
Consumer price index
1,6%
3,3%
3,1%
2,3%
3,8%
2,1%
2,2%
2,9%
1,5%
2,4%
4,2%
1,6%
2,3%
0,5%
0,3%
Data source: "Value Line Investment Survey," August 2015.
2,9%
3,6%
2,2%
Exhibit 4
Rockboro Machine Tools Corporation
Stockholder Comparative Data
(thousands of shares)
2004
Shares
Percentage
Founders’ families
Employees and families
Institutional investors
Growth oriented
Value oriented
Individual investors
Long term; retirement
Short term; trading oriented
Other; unknown
Total
2014
Shares
Percentage
3.585
5.516
13%
20%
5.113
4.443
18%
16%
3.585
2.207
13%
8%
1.602
3.409
6%
12%
10.205
1.379
1.103
37%
5%
4%
6.767
3.409
3.153
24%
12%
11%
27.578
100%
27.896
100%
Note: The investor-relations department identified these categories from company records. The type of institutional
investor was identified from promotional materials stating the investment goals of the institutions. The type of individual
investor was identified from a survey of subsamples of investors.
Source: Author estimates.
Exhibit 5
Rockboro Machine Tools Corporation
Per-Share Financial & Stock Data1
Sales/
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Stock price
2
$
EPS
share
16,12 $ 1,19 $
15,00
1,28
15,23
0,45
16,37
0,86
21,08
1,27
24,93
1,90
30,10
2,67
34,59
3,07
37,80
3,24
26,61
0,75
31,82
1,03
41,94
1,29
45,49
(3,25)
43,25
0,69
40,68
(7,57)
2
DPS
0,37
0,39
0,40
0,42
0,45
0,47
0,51
0,59
0,64
0,64
0,64
0,64
0,64
0,64
0,32
2
CPS
High
Low
Avg.
$ 2,03 $ 21,11 $ 10,18 $ 14,85
2,14
21,23
8,20
13,50
1,17
18,50
10,18
13,35
1,65
22,48
12,17
18,36
2,13
23,84
18,01
21,00
2,86
26,70
18,25
22,73
3,75
34,34
22,75
30,31
4,22
44,13
32,66
38,29
4,41
46,73
20,81
36,58
1,52
33,00
15,52
25,07
1,92
20,31
14,16
17,03
2,04
18,42
13,36
16,27
2,86
16,82
12,74
14,50
1,99
13,30
9,28
11,26
(0,97)
14,03
11,85
13,00
1
Adjusted for 3-for-2 stock split in January 2005.
2
EPS = earnings per share; DPS = dividend per share; CPS = cash earnings per share
nmf = not a meaningful figure
Source: Author estimates.
Average
P/E
12,5
10,5
29,7
21,3
16,5
12,0
11,4
12,5
11,3
33,4
16,5
12,6
nmf
16,3
nmf
Shares
Payout Dividend outstanding
ratio
31%
30%
89%
49%
35%
25%
19%
19%
20%
85%
62%
50%
nmf
93%
nmf
yield
2,5%
2,9%
3,0%
2,3%
2,1%
2,1%
1,7%
1,5%
1,7%
2,6%
3,8%
3,9%
4,4%
5,7%
2,5%
(millions)
23,4
24,1
26,8
27,1
27,6
28,0
28,1
28,2
28,3
28,0
28,1
28,1
28,3
28,3
27,9
Exhibit 6
Rockboro Machine Tools Corporation
Comparative Industry Data
Annual growth rate of
1
cash flow (%)
Sales
($millions)
Last 5
years
Next 3-5
years
Current
payout
ratio (%)
Current
Debt/
dividend
2
yield (%) equity(%)
Insider
ownership (%)
P/E
ratio
Rockboro Machine Tools Corp.
1.135
−1.5%
15,0%
nmf
0%
28,4%
34,3%
nmf
CAD/CAM companies (software and hardware)
Autodesk, Inc.
Ansys, Inc.
Cadence Design
Mentor Graphics
PTC
Synopsys, Inc.
2.512
941
1.702
1.244
1.357
2.058
3,0%
14,5%
0,0%
43,0%
8,5%
11,0%
10,5%
6,5%
10,0%
4,0%
4,5%
7,5%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
33,7%
0,0%
26,1%
18,1%
68,7%
1,5%
1,0%
1,9%
3,2%
2,6%
1,4%
1,4%
nmf
23,0
17,6
16,9
26,4
15,4
Electrical-industrial equipment manufacturers
Emerson Electric Company
Hubbell Inc.
Rockwell Auto
22.304
3.359
6.624
3,5%
7,5%
12,5%
3,5%
6,0%
5,5%
47%
37%
39%
3%
2%
2%
52,8%
31,0%
34,1%
0,8%
1,3%
1,5%
17,6
21,3
19,9
Machine tool manufacturers
Actuant Corp.
Lincoln Electric Holdings, Inc.
Milacron, Inc.
Snap-On Inc.
1.400
2.813
1.211
3.278
6,0%
11,5%
nmf
9,5%
5,5%
3,5%
nmf
8,5%
2%
24%
0%
26%
0,1%
1%
0%
2%
38,5%
0,2%
265,1%
39,1%
3,7%
3,3%
0,0%
3,4%
19,2
18,3
nmf
16,8
nmf = not a meaningful figure
Rockboro cash flow growth calculations use an adjusted cash flow for 2014 that omits the restructuring costs.
1
2
Based on book values.
Data source: "Value Line Investment Survey," February 2016.
Exhibit 7
Rockboro Machine Tools Corporation
Selected Healthy Companies witth High- and Zero-Dividend Payouts
Expected return
on total capital
(next 3-5 years)
Expected growth
rate of dividends
(next 3-5 years)
Pharmaceutical
Oil/gas pipeline—MLP1
Telecommunications utility
Electric utility
Chemical manufacturing
Auto manufacturer
13,0%
8,0%
5,5%
6,5%
10,5%
7,5%
Auto parts
Fried chicken fast food
Supply chain IT
Biotechnology
Entertainment radio
Online retail
38,5%
21,0%
27,5%
27,0%
26,5%
15,0%
Industry
High-Payout Companies
Pfizer
Suburban Propane
CenturyLink, Inc.
Southern Company
Dow Chemical
Ford Motor Co.
Zero-Payout Companies
AutoZone
Popeyes
Manhatttan Assoc
Biogen
Sirius XM
Amazon.com, Inc.
Current
dividend
payout
Current
dividend
yield
Expected growth
rate of sales
(next 3-5 years)
Current
P/E
ratio
6,0%
73,8%
3,6%
1,5%
21,1
1,0%
3,0%
3,0%
11,0%
14,5%
212,1%
86,4%
75,1%
46,0%
43,1%
8,2%
6,7%
4,8%
4,6%
4,1%
1,5%
3,0%
3,5%
7,0%
2,5%
24,5
12,8
16,5
12,4
8,3
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
12,8%
14,5%
10,0%
14,0%
8,5%
17,5%
19,7
28,8
50,1
16,6
26,4
nmf
Data source: "Value Line Investment Survey," August 2015.
1
A master limited partnership (MLP) paid no corporate taxes. All income taxes were paid by shareholders on their share of taxable earnings.
Exhibit 8
Rockboro Machine Tools Corporation
Projected Sources-and-Uses Statement Assuming a 40% Payout Ratio (in millions of dollars)¹
Assumptions:
2015
2016
2017
2018
2019
2020
2021
15%
2,1%
20,0%
15%
4,0%
20,0%
15%
5,0%
20,0%
15%
5,5%
20,0%
15%
6,0%
20,0%
15%
6,5%
20,0%
15%
6,5%
20,0%
2015
2016
2017
2018
2019
2020
2021
Total
2015–21
$1.305
$1.501
$1.726
$1.985
$2.283
$2.625
$3.019
$14.444
Sources:
Net income
Depreciation
Total
27,0
33,9
61,0
60,0
39,0
99,1
86,3
44,9
131,2
109,2
51,6
160,8
137,0
59,4
196,3
170,6
68,3
238,9
196,2
78,5
274,7
786,4
375,6
1.161,9
Uses:
Capital expend.
Change in working capital
Total
65,3
29,3
94,5
75,0
33,6
108,7
86,3
38,7
125,0
99,3
44,5
143,7
102,7
51,2
153,9
118,1
58,8
177,0
135,9
67,7
203,5
682,6
323,7
1.006,3
Excess cash/(borrowing needs)
Dividend
(33,6)
5,4
(9,6)
12,0
6,2
17,3
17,1
21,8
42,4
27,4
61,9
34,1
71,2
39,2
155,7
157,3
After dividend
Excess cash/(borrowing needs)
($39,0)
($21,6)
($11,1)
($4,8)
$15,0
$27,8
$32,0
($1,6)
159,4 $
445
35,8%
181,0 $
493
36,7%
192,1 $
563
34,1%
196,8 $
650
30,3%
181,8 $ 154,0 $
759
896
23,9%
17,2%
Sales Growth Rate:
Net Income as % of Sales
Dividend Payout Ratio
Projections
Sales
Beginning Debt
Beginning Equity
Debt/Equity Ratio
$
120 $
424
28,4%
¹This analysis ignores the effects of borrowing on interest expense.
Source: Author estimates.
Debt capacity
Unused debt capacity
$170
$49
122,0
1053
11,6%
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