Oxford University Rockboro Machine Tools Corporation Worksheet

FINA 6340 Advanced Corporate Finance
Case 26. Rockboro Machine Tools Corporation
1. Read and briefly summarize the case. What are the problems here?
2. Find the impact of different payout levels on the need for external funds by 2021. This
abbreviated approach uses the total cash-flow figures (that is, for 2015 through 2021) found in
the right-hand column of case Exhibit 26.8. To find the amount of new debt, use the basic
sources-and-uses-of-funds identity, as used in case Exhibit 26.8. What are the implications of
different payout levels for Rockboroàcapital structure and unused debt capacity?
Rockboro Machine Tools Corporation (dollars in millions)
0%
$786.4
Targeted Dividend Payout
20%
40%
50%
$786.4
$786.4
$786.4
Exhibit 26.8
Increase in assets
Depreciation
New debt
Initial debt (2014)
Ending debt (2021)
1,006.3
375.6
1,006.3
375.6
1,006.3
375.6
1,006.3
375.6
Exhibit 26.8
Exhibit 26.8
120.4
120.4
120.4
120.4
Exhibit 26.2
Initial equity (2014)
Earnings retained
Ending equity (2021)
423.8
423.8
423.8
423.8
Exhibit 26.2
Net Income
Dividend
Earnings retained
Total capital (2021)
Debt / Equity (2021)
Debt capacity
Max debt / equity
= 40%
Debt capacity used
Unused debt capacity
3. Based on the signaling and clientele considerations, how will Rockboroàvarious providers of
capital, such as its stockholders and debtholders, react to a declaration of no dividend? What
about the announcement of a 40% payout?
FINA 6340 Advanced Corporate Finance
4. What is the nature of the share-repurchase decision that Larson much make? How would this
affect the dividend decision?
5. What should Larson recommend? You can use numbers from the case Exhibits 26.1-8 and the
analysis above to justify your argument.

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