Electronic Designing, Inc.

Electronic Designing, Inc.

Electronic Designing, Inc. (“EDI” or the “company”) recently received $40 million in proceeds correlated to the sale of a new more efficient motherboard design. Thomas, Jenna and Nate, each of which holds 25% ownership of EDI, decided to sell the motherboard design after the majority owners determined that the cost of manufacturing the motherboard at a new facility would be too expensive. The majority owners are now faced with the decision on how to utilize the $40 million in proceeds. The following options have been presented by the majority shareholders: i) pay a special one-time dividend, ii) pay off existing debt obligations and expand manufacturing capacity, iii) repurchase shares, or iv) pay a regular cash dividend. The options previously noted will be evaluated by Group 7 to determine the impact each proposal will have on EDI.

1. Thomas’ proposal is not going to have much of an impact on the stock price. The change in share price will occur once the company hits the ex-dividend date. At the ex-dividend date, the share price will decrease by an amount similar to the amount of the dividend declared. The subject dividend will be announced as a one-time event. Subsequently, the shareholders won’t expect any changes that would cause the stock price to move in any manner other than reflecting the decrease in the declared dividend.Shareholders may portray the dividend as a negative event, because it appears as if there are no positive NPV projects for the company to invest the excess funds into, thus negatively affecting the value of the company.

2. Jenna’s proposal has both the potential to increase and decrease the value of the company depending on the current financial positions the company is in. If financial distress costs were near imminent due to being over-levered, then paying off debt would increase the value of EDI. However, if there are no financial distress costs, the debt the company possesses would add value to the...