Dividend Policy At Linear Technology Essay

1402 words - 6 pages

Dear Board Members,

I feel great responsibility in sending this memorandum to you all, as my recommendation could and most probably would have an impact on our company’s future. It has indeed been a hard decision to make, but through careful analysis, I have reached the conclusion that it would be best to keep the dividend as it is now.
Before I brief you on the specifics of my decision, I feel the need to provide basic information about our company that surrounds this issue. To be more specific, I am referring to the past decisions on our dividend policy and our financing needs. Even if you are already aware of the specifics, please bear with me as this has played a crucial role in ...view middle of the document...

Furthermore, our research and development expenses were also modest, which all in all, contributed to our low financing needs. However, our recent plans to seek for business opportunities in Asian markets, as well as the uncertain effects of the Iraq war enhance our financing needs substantially.
With this basic information, we are given the task of deciding whether to increase the dividend rate or maintain the current rate. Why then, would a company want to increase dividends? Why should a company decide to increase its dividend rates?
There could be several reasons for a company issuing dividends. The first, though least likely, reason is that it prevents agency conflicts. With the issuance of dividends, the free cash flow is no longer in the hands of management, and thus reduces or even eliminates the agency costs. Most managers, however, do not view their policy on dividends as a means to impose self-discipline. The second reason could be that with asymmetric information, the issuance of dividends could signal a strong position in a risky market because it means that the company is able to afford the higher dividend. The last reason is that such further issuance of dividends attracts investors that are more sensitive to a company’s dividend policy, such as mutual funds, European investors companies and retail investors.
Historically, there has been a trend away from the issuance of dividends from the late 1970s to the twentieth century. This was greatly due to the abundant growth opportunities that hindered the managers from distributing the excess in cash flow. Moreover, managers have been reluctant to issue dividends as the information asymmetry made the payout ratio highly inflexible, reluctant to cut dividends. Today, however, the trend has changed because with the saturation and mature growth of the markets, there are not as many positive NPV projects. It also helped that the managers are no longer so strict on their payout ratios anymore.

Finally moving on to the analysis of our dividend policy, what should we thus do? Since we have reached a relatively mature growth and because we have an excess in free cash flow, should we increase the issuance of dividends? Or, due to potential business opportunities and the uncertain effects of the Iraq war, should we leave the payout ratio as it is today?
Let us first analyze the consequences of keeping the cash inside the firm. If our company decides to retain all the cash inside the firm, we would first have the advantage of cash liquidity. In other words, when new market opportunities arise and require costly funding, we would have the liquidity needed to enter such positive NPV projects. On the other hand, not using debt financing would mean higher tax costs for our company. This acts as an opportunity cost of keeping cash within our company. Despite this opportunity
Then, what if we pay out our entire cash balance as a special dividend? Numerical inference can be found at...

Other Papers Like Dividend Policy at Linear Technology

Audit Risk Essay

970 words - 4 pages OPINION SURVEY OF THE FACTORS IMPACTING ON DIVIDEND POLICY OF FIRMS OPERATING IN THE FINANCIAL SECTOR OF MAURITIUS 1. In which sub-sector does your company operate in? Please tick the appropriate Banking Offshore Banking Insurance Re-Insurance Investment Leasing 2. Approximately how many employees work in your company? Please encircle the appropriate • Less than 10 • 10 – 19 • 20-49 • 50-99

Dividend Policy Essay

2097 words - 9 pages earnings. So a firm's dividend payment capacity becomes high. TYPES OF DIVIDEND POLICY There are basically 4 types of dividend policy. Let us discuss them on by one: 1) Regular dividend policy: in this type of dividend policy the investors get dividend at usual rate. Here the investors are generally retired persons or weaker section of the society who want to get regular income. This type of dividend payment can be maintained only if the

Gainesboro Machine Tools Corporation Executive Summary

1408 words - 6 pages innovation. By late 2004 the company started to turn around its attrition with a positive growth outlook. In August 2005, Ashley Swenson, the Chief Financial Officer of Gainesboro, was considering 3 dividend policies to implement; a zero-dividend payout, a 40% dividend payout or $0.20 a share, or a residual dividend payout. Discussion Dividend Policy Choices 1. Zero-dividend payout: This option of not paying a dividend allows Gainesboro to invest

Case 29 Gainesboro Machine Tools Corporation

1134 words - 5 pages Ashley Swenson recommend to the board of directors with regard to a long-term dividend payout policy for Gainesboro Machine Tools Corporation? As the case mentions having a zero payout policy would place the company's new and advanced technologies in a high growth and high technology category. However, if the market views Gainesboro as a traditional electrical company then they would expect strong capital appreciation and lower dividend

Week 2 Homework

1255 words - 6 pages policy--nonalgorithmic Answer: a The amount of new investment which must be financed with equity is: $1,000,000 ( 70% = $700,000. Since the firm has $800,000 of net income only $100,000 will be left for dividends. 8) |Ting Technology has a capital budget of $850,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also | |wants to pay a dividend of $400,000. If the company

Gainesboro Machine Tool Corporation

938 words - 4 pages now i whether to pay dividends out of the positive net income in 2005 or repurchase stock. If dividend option is adopted the company has to decide among three policies: -zero dividend payout -40% dividend payout -residual dividend payout Analysis: Zero dividend policy: Pros: - its a growing company and needs to reinvest retained earnings - borrowing for dividend can be avoided - can be positioned as high growth and high technology

Are dividend payouts linked to equity ownership pattern – a case of the drugs and pharmaceutical industry

1474 words - 6 pages dividend policy has no effect on either it’s value or cost of capital. Investors value dividends and value equally. Payout Date – The date of which dividend is actually distributed to the shareholders. Factors Affecting Dividend payouts – • Stability of earnings • Extent of share distribution • Trade Cycles • Need for Additional Capital • Taxation • Legal Requirements LITERATURE STUDY The payment of dividend is associated with profitability

Finance Assignment 1

783 words - 4 pages invest in a major capital project in 2012. The capital budget for this project is $12.0 Million in 2012. • If Middlesex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars? • What is the 2012 dividend payout ratio if the company increases its dividends at 8%? • If the company follows a residual dividend policy, and maintains its 35% Debt level in its

Fins1613 Practice Paper - 2010

860 words - 4 pages in operating profits every year for the indefinite future. Prospects’ cost of capital is 10% and not subject to taxes. Prospects’ dividend policy is a payout ratio of 100%. Prospect is yet to pay current year’s dividends. (l) What is Prospects’ dividend per share? (m) What is Prospects’ cum-dividend and ex-dividend share price? (n) If Prospects increases dividends by $0.5 per share only for the current year and the extra dividend is

Case Study

631 words - 3 pages While the argument of the irrelevance of corporate dividend policy in perfect capital markets has been very important in financial theory, there is also much controversy about dividend policy in the real world where market imperfections exist To fund an increased dividend payout or a stock buyback three possible scenario were suggested: invest less, borrow more, or issue more stock. Taking into consideration company’s policy, it is more likely

Dividend Payout Policy Individual Assignment

1291 words - 6 pages , fluctuated greatly, ranging from a low of $1.72 to a peak of $27.65. It should be noted with great attention that HWL’s DPS had remained unchanged at $1.73 for ten consecutive years before it rose again to $1.92 in 2010.  Dividend Policy As one of the biggest corporations in Hong Kong, HWL has long been dedicated to providing stably increasing returns to its investors (HWL, Annual Report 2012). The actual dividend payouts follow quite consistent with

Related Essays

Dividend Policy At Linear Technology Essay

1926 words - 8 pages is recommended. In conjunction with Coghlan's vision, continuing a dividend policy will be favorable to the investor that shares in the same income and growth goals and proves to the market that Linear is confident in maintaining its profitability even through the downturns of market cycles. Works Cited 1) Baker, Malcolm P., and Alison B. Wagonfield. "Dividend Policy at Linear Technology." Harvard Business School (2003). Web. 2) Smith, Tom

Linear Technology Dividend Policy Essay

2554 words - 11 pages Dividend Policy at Linear Technology Firms pay dividends for a multitude of reasons, such as the ability to make use of excess cash that stockpiles when a firm lacks enough viable investment opportunities with positive NPVs. Paying dividends can also send strong signals to investors of positive future earnings while rewarding them with immediate cash returns. From the market’s perspective, merely sending statements that a company is

Panera Bread Company Analysis

1256 words - 6 pages Memorandum To: James Cotter From: Chris Smith, Adam Grossman, Richard Budd Date: March 21, 2016 Subject: Recommendation for Dividend Policy at Linear Technology Introduction and Overview The purpose of this memo is to analyze the financial data of Linear Technology and determine whether or not to increase the dividend payout. Linear Technology is a semiconductor company founded in 1981. The company specializes in designing, manufacturing

Linear Tech Essay

782 words - 4 pages Dividend Policy at Linear Technology case study This case presents a decision to be made by management of Linear Technology about their dividend policy. Company is 7th largest by market capitalization in the SOX. Linear technology went public in 1986 and declared first dividend on October 13, 1992. Dividend amount is $0.05 per share quarterly and there were 4 stock splits for now. Management have to decide whether to increase dividend