Finance

Case2：Dividend Policy at Linear Technology

1. Using Exhibit 2, calculate the following ratios from 1992 – 2003. Note the 2003 has only three quarters’ financial data, you need an annual adjustment for some numbers in 2003.

Dividend Policy:

Dividend Per Share (Split-Adjusted) = Dividend Paid / Common Shares Outstanding;

Dividend Payout Ratio = Dividend Paid / Net Income;

Dividend Yield = Dividend Per Share / Share Price;

Repurchase Per Share (Split Adjusted) = Repurchase Amount / Common Shares Outstanding;

Profit Margin:

Net Income (% of Sales) = Net Income / Sales;

Cash Flow (% of Sales) = Net Cash Flow / Sales

Investment Ratio:

CAPX Ratio = Capital Expenditure / Sales;

Pre Investment Cash Flow / CAPX = (Operating Cash Flow + Capital Expenditure) / Capital Expenditure

Based on the above calculated ratios, answer the following questions:

a) Describe Linear Technology’s payout policy. Does it follow a target payout ratio?

b) How will the decision to increase dividend to $0.06 per share affect the company’s investment need?

c) How do you compare Linear Technology’s payout policy, profit margin, and investment needs with its competitors as shown in Exhibit 12?

2. From Exhibit 3, describe the time pattern of Linear Technology’s dividend payout, stock repurchases, and stock splits. What are the market reactions to the announcement of dividend increase, stock repurchases, and stock splits, respectively? Are there any signaling effects? If there are, what information is the company trying to signal?

3. If Linear were to pay out its entire cash balance as a special dividend, what would be the effect on value? On the share price? On earnings? On earnings per share? What if Linear repurchased shares instead? Assume a 3% rate of interest. Also assume a perfect market.

4. Considering some real-world factors, why do firms pay dividends? Why do firms repurchase stocks? What factors might have caused the rate of dividend initiations to change over...