In 1992, Linear Technology, a constructor and producer of analog semiconductors, introduced a dividend. The company offered a higher dividend payout of approximately $0.01 per share annually after the decision. In the year ending 2002, Linear underwent its first substantial decline in the sales figure since 1986 IPO. The decline was recorded by a fall of 47%, which led to a decrease in profit level by 54% .in spring of 2003, the CFO, Paul Coghlan is in the process of determining if another suggested increase in the dividend will pull up Liner’s payout ratio to 33.1% - which is high with regard to the technology firm trends.
Forecast for 2003
Case Flow Statment
Tax Consequences of Dividends
Dividend VS Repurchase Calculations
1. What is Linear’s current payout policy?
2. What are Linear’s financing needs? (check the cash flows and investment (exhibit TN-1) and the cash balances (Exhibit TN-2)
3. What should Paul Coghlan recommend to the board? Why?
Note, to answer this and the next questions you need to analyze:
Assymmetries of information
Consider also the effect of stock-options on the decision.
The following questions also are study material for the examinations. You do not need to answer them in your group-homework.
4. What are the advantages and disadvantages for the firm’s shareholders if:
a) The firm increases dividends.
b) The firm maintains the same amount of dividends
c) The firm cuts dividends.
5. What will be the market reaction to each of the three actions described in the previous question? Why?
6. If you were the manager acting in the interest of the current shareholders, what would you do? (This question need to be addressed by start describing the potential advantages and disadvantages of the different alternatives, and then provide a subjective, but educated, answer.
7. Would your answer to the previous question change if managers act in their own interest?