Financial Management Assignment
Linear Technologies Case Solution
1) Describe Linear Technologies pay-out policy.
As we can see from Exhibit 1 Linear Technology has been paying dividend steadily since 1992. Thus the pay-out policy is a large part in dividends. Its first dividend is paid in 1992.
The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.
Also analysing the numbers
…show more content…
The interest rates in the markets have been low and Linear wants to use cash in a conservative manner. Also since buying its own stock doesn’t affect the value of the firm and in turn the shareholders this is a wise option.
Moreover, since 2002 LT has never had a long-term debt while its Capital Expenditure expenses are low. When comparing its Capital Expenditure as a percentage of net income since 1992, it has had an average ratio of 22% while its competitors Maxim and Intel struggled with 57.45% and 177.11%.
2) What are Linear’s financing needs? Should Linear return cash to its shareholders? What are the tax consequences of keeping cash inside the firm?
All of LT’s distributions, whether in the form of dividends or stock repurchases will be taxed at the investors personal rate. Buy shares and keeping cash in the firm will depend of the tax rate of the investors relative to that of the firm. Under the former option the money is taxed at the corporate rate and in the latter at personal rate.
In its current income range LT’s tax rate is at 29%. In 2001 it was taxed at around 30% when it had more than twice the income before taxes. Therefore the current tax rate can be assumed the same for the future. Therefore the tax consequences will depend a lot on whether the investors or the company has more tax rates.
If the tax rate of shareholders is higher, it would be better to keep the cash internally and invest but if LT’s tax rate is higher the
If Ms. Jameson chooses stock options for her compensation, she will not need to pay taxes until she actually exercises them and sells the shares. At that point, gains on the shares will be taxed at either ordinary tax rate[3] or at capital gain tax rate[4], depending on whether she has held the stock for less than or more than one year after exercising the options. If taxes are considered, the value of option after tax will decrease. In the case that Ms. Jameson holds stocks for less than 1 year, she risks to her income tax rate that could be changed at the fifth year. While there will be no risk regarding tax rate, if she hold the stocks for more than 1 year. The latter case, however, increases risk regarding the share price in the future, in which it will have an effect on her capital gain or loss.
This is no surprise due to the major expansion that CC took on in 2001. Lastly, the long term debt to capitalization ratio slowly decreases which is just showing how CC is not being risky with their capital through debt.
James Gitanga was not sure about the unusual capital structure of the Company, avoiding the long-term debt. We believe that the long-term capital structure across the industry was pre-determined by the high capital expenditures and steady cash inflows. Thus, issuing long-term debt was more preferable. Besides, by issuing debt they would enjoy the tax shield since interest on long-term debt is tax-deductible.
b. Ken sold 1,000 shares of stock for $32 a share. He inherited the stock two years ago. His tax basis (or investment) in the
When a company decides to pay dividends, it has to be careful on how much it will be given to the shareholders. It is of no use to pay shareholders dividends
George C. Philippatos and William W. Sihler, 'Models of Dividend Policy', Financial Management (Allyn and Bacon), 228-229
The technology portion of their company has grown tremendously which has caused so much of their growth. In addition, they found the perfect formula to appeal to and retain customers. Most of their customers are loyal to their company and insist on sticking to their products. Their market capitalization, $639,922 million, is extremely high compared to other companies in their industry They returned about $8 billion to shareholders during their quarter. Also, their gross margins, currently at 38.01%, are high at passed by
1. All distributions (excluding reasonable salary) to Paula and Mary will be taxed as dividends to them. And the corporation could not deduct this part of distribution.
Keeping in view the above figures, it turned out that the company’s remaining deferred tax assets amount to $ 5.2 billion and since it is a substantial amount the company’s management may however believe that it would be realized based on forecasted taxable income. However, as per FAS # 109, paragraph 17, issued February 1992, whereby it
c. Is your estimate of Lex’s cost of equity appropriate as a discount rate for Lex’s total operating cash flows? Why or why not?
FPL has a very high dividend payout ratio of around 90% and has a 47 year streak of dividend increases. FPL’s dividend payout ratio is
* Increase the value of the firm through the benefit of tax shield from current $960million to $1.063billion.
The calculation of ABC co.’s Cash Flow statement involves cash receipts and cash payments in three categories as, operating, investing, and financing activities. This calculation tells that the ABC Company enjoyed a cash flow provided from operations of about $3,500 in year 19X2. The statement also shows that ABC Company used more cash in investing activities than was provided from different sources. The net cash flows from ABC Company’s business were positive, $3,000. For ABC co. cash generated from operations is the primary source of cash flow, the company used the cash flow from operating and investing activities to make payment of dividends. (See appendix)
The long-term liquidity risk ratio such as LT debt/Equity, D/E, and Total Liabilities to Total Assets all show a decline from year 2005 due to the repayment of debts. The interest coverage ratio also shows a healthy number of 29.45 in comparison to the industrial average of 15.04 indicating a high ability to pay out its interest expense. Such a low relative risk is not surprising due to the nature of its business depending heavily in R&D development and large intangible assets.
This paper explores and analyzes the different aspects of an investment in a company. Two different corporations were analyzed and a decision was made regarding which corporation would be given an investment. The acquisition of two corporations was not allowed, as there was a spending limit among the two. I made substantial analysis for the two corporations, as this is very significant for possible growth of our own company. I analyzed a five-year projected income statement and a five-year projected cash flow. I also determined the Net Present Value, and Internal Rate of Return among the two companies to make a decision. This paper also includes three peer-reviewed sources to combine with the theoretical explanations.