Dividend Policy at Linear Technology (spreadsheet of case exhibits available on Blackboard) 1. What is Linear Technology’s dividend payout policy? Do they seem to have a long-run target payout ratio with a partial dividend adjustment process? 2. What is Linear Technology’s cash balance in 2003, and assuming this balance, a risk-free interest rate of 3%, a corporate tax rate of 35%, how long could they fund a $0. 06 per share quarterly dividend? 3. What is the historical context of tax rates, market to book ratios, and dividend initiation rates as shown in Exhibits 7, 8 and 9?
How are these relevant to Linear Technology’s decision? 4.
What are the tax consequences of keeping the cash inside the firm using a MM framework? For this analysis, compare the firm distributing a dollar of cash one year from now and earning r% for the one year with distributing the cash now to shareholders who would also earn r% for one year. Assume a corporate tax rate of tc, a tax rate on dividends or capital gains of td and a personal tax rate of tp, and calculate the after tax amount of a of distribution.
What does this imply about tc versus tp from a decision standpoint?
Using the formula relating municipal and corporate bond rates, that is rmuni = rcorporate(1 – tp), what is the implied tp from Exhibit 8? What does this tell you about Linear Technology’s decision to hold cash and its use of leverage? 5. Ignoring the signaling aspects, what is the expected share price of (a) retaining $1. 5 billion versus (b) repurchasing shares and (c) paying a $1. 5 billion dividend? Use the stock price (Exhibit 2) and number of shares outstanding (Exhibit 3) at the end of 2002 shown as the starting point. 6.
Assume the $1. 5 billion in cash earns 3% interest. Also assume that net income will be the same at the end of 2003 as in 2002 and that payment of a dividend or repurchase precludes earning interest on the $1. 5 billion. What would be the (a) total net income (earnings) of the firm, (b) number of shares outstanding, and (c) earnings per share at the end of 2003? 7. Assume that the tax rate on capital gains is the same as on dividends (perhaps 15%). From a tax perspective, does it matter whether the firm pays a dividend or repurchases shares?
Why or why not? 8. What are the signaling implications of paying a dividend? Does Linear Technology’s current level of dividends signal anything about the future prospects of the firm? 9. Consider the agency aspects of the dividend versus repurchase decision. Do the executive stock options create a potential conflict of interest between managers and shareholders? Why or why not? 10. What is a clientele effect? Is there evidence of a clientele effect from Exhibit 4? How are the
Cite this Linear Technologies
Linear Technologies. (2019, May 02). Retrieved from https://graduateway.com/linear-technologies-1103/