Integrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. IWT’s technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, Jackson and Smithfield have been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, IWT must now access outside equity capital to fund its growth, and Jackson and Smithfield have decided to take the company public. Until now, Jackson and Smithfield have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Your new boss at the consulting firm Flick and Associates, which has been retained to help IWT prepare for its public offering, has asked you to make a presentation to Jackson and Smithfield in which you review the theory of dividend policy and discuss the following issues. a. (1) What is meant by the term “distribution policy”? How has the mix of dividend payouts and stock repurchases changed over time? (2) The terms “irrelevance,” “dividend preference” (or “bird-in-the-hand”), and “tax effect” have been used to describe three major theories regarding the way dividend payouts affect a firm’s value. Explain these terms, and briefly describe each theory. (3) What do the three theories indicate regarding the actions management should take with respect to dividend payouts? (4) What results have empirical studies of the dividend theories produced? How does all this affect what we can tell managers about dividend payouts?

Integrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. IWT’s technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, Jackson and Smithfield have been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, IWT must now access outside equity capital to fund its growth, and Jackson and Smithfield have decided to take the company public. Until now, Jackson and Smithfield have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Your new boss at the consulting firm Flick and Associates, which has been retained to help IWT prepare for its public offering, has asked you to make a presentation to Jackson and Smithfield in which you review the theory of dividend policy and discuss the following issues. What is meant by the term “distribution policy”? How has the mix of dividend payouts and stock repurchases changed over time? The terms “irrelevance,” “dividend preference” (or “bird-in-the-hand”), and “tax effect” have been used to describe three major theories regarding the way dividend payouts affect a firm’s value. Explain these terms, and briefly describe each theory. What do the three theories indicate regarding the actions management should take with respect to dividend payouts? What results have empirical studies of the dividend theories produced? How does all this affect what we can tell managers about dividend payouts?

Coast Corporation's research and development department has a a project to develop a new product which is expected to be very profitable. However, this very expensive product requires approval from the company's controller, J.Davis. Since the corporate profits have been decreasing lately, Davis hesitates to approve a project that will incur significant expenses that cannot be capitalized. To overcome this problem, he's thinking about hiring a firm to develop this product and purchasing the patent of the product from this firm. w wwn wwwww Required: a. Why doesn't Davis prefer producing the product internally, and what are the ethical issues in this situation. b. What would you do if you were in Davis's place? ww n ww www wwww

Kunda and Sitwala Company is considering manufacturing special drill bits and other equipment for mining rigs. The proposed project is currently regarded as complementary to its other lines of business, and the company has certain expertise by virtue of its having a large mechanical engineering staff. Because of the large outlays required to get into the business, management is concerned that Kunda and Sitwala earn a proper return. Since the new venture is believed to be sufficiently different from the company’s existing operations, management feels that a required rate of return other than the company’s present one should be employed. The financial manager’s staff has identified several companies (with capital structures similar to that of Kunda and Sitwala) engaged solely in the manufacture and sale of mining drilling equipment whose common stocks are publicly traded. Over the last five years, the median average beta of these companies has been 1.28. The staff believes that 18…

c. Courteney-Cox, Inc., is a Texas-based manufacturer and distributor of components and replacement parts for the auto, machinery, farm, and construction equipment industries. The company is presently funding a program of capital investment that is necessary to reduce production costs and thereby meet an onslaught of competition from low-cost suppliers located in Mexico and throughout Latin America. Courteney-Cox has a limited amount of capital available and must carefully weigh both the risks and potential rewards associated with alternative investments. In particular, the company seeks to weigh the advantages and disadvantages of a new investment project, project X, in light of two other recently adopted investment projects, project Y and project Z: Per Year Project X $10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 PV of Cash Flow @ 5% Investment Outlay in 2000: Calculate the minimum certainty equivalent…

Hello, EagleEye Company, a manufacturer of digital cameras, is considering entry into the digital binocular market. EagleEye Company currently does not produce binoculars of any style, so this venture would require a careful analysis of relevant manufacturing costs to correctly assess its ability to compete. The market price for this binocular style is well established at $134 per unit. EagleEye has enough square footage in its plant to accommodate the new production line, although several pieces of new equipment would be required, their estimated cost is $4,750,000. EagleEye requires a minimum ROI of 12% on any product line investment and estimates that if it enters this market with its digital binocular product at the prevailing market price, it is confident of its ability to sell 17,000 units per year. Question: Identify the costs that EagleEye Company would consider for decision of entering the digital binocular market. (Select all that apply). 1. Raw materials and direct…

Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new con-tinuous casting process. SSC’s founders, Donald Brown and Margo Valencia, had been employed in the research department of a major integrated-steel company, but when that company decided against using the new process (which Brown and Valencia had developed), they decided to strike out on their own. One advantage of the new process was that it required relatively little capital compared to the typical steel company, so Brown and Valencia have been able to avoid issuing new stock and thus own all of the shares. However, SSC has now reached the stage in which outside equity capital is necessary if the firm is to achieve its growth targets yet still maintain its target capital structure of 60% equity and 40% debt. Therefore, Brown and Valencia have decided to take the company public. Until now, Brown and Valencia have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm,…

T4 Enterprises develops sophisticated communications equipment for government and commercial use. It is organized into two divisions, which are evaluated as investment centers. The cost of capital used in evaluating the divisions is 12 percent. A local startup has developed and patented a process that significantly shortens production times. The startup has offered to either sell the patent to T4's Government Division (GD) or to lease the exclusive rights to the process. (The process is not usable in the Commercial Division). The lease (and the estimated economic life of the process) is seven years. If purchased, the technology would cost $5.0 million. A seven-year lease would require annual payments of $1,330,000. The division manager of GD estimates that annual income using the process (before considering any depreciation or lease payments) would be $21 million. The investment for GD (before considering any impact from the new technology) is $126 million. Assume that the patent would…

Ahorita Company manufactures wireless transponders for satellite applications. Ahorita has recently acquired Zelltech Company which is primarily known for its software communications development, but also manufactures a specialty transponder under the trade name “Z-Tech” that competes with one of Ahorita’s products. Ahorita will now discontinue Z-Tech and projects that its own product line will see a market share increase. Nonetheless, Ahorita’s management will maintain the rights to the Z-Tech trade name as a defensive intangible asset to prevent its use by competitors, despite the fact that its highest and best use would be to sell the trade name. Ahorita estimates that the trade name has an internal value of $1.5 million, but if sold would yield $2 million. a. How does the FASB ASC glossary define a defensive intangible asset? b. According to ASC Topi 805 Business Combinations, what is the measurement principle that an acquirer should follow in recording identifiable assets…

Ahorita Company manufactures wireless transponders for satellite applications. Ahorita has recently acquired Zelltech Company which is primarily known for its software communications development, but also manufactures a specialty transponder under the trade name “Z-Tech” that competes with one of Ahorita’s products. Ahorita will now discontinue Z-Tech and projects that its own product line will see a market share increase. Nonetheless, Ahorita’s management will maintain the rights to the Z-Tech trade name as a defensive intangible asset to prevent its use by competitors, despite the fact that its highest and best use would be to sell the trade name. Ahorita estimates that the trade name has an internal value of $1.5 million, but if sold would yield $2 million. Answer the following with supporting citations from FASB ASC a. How does the FASB ASC glossary define a defensive intangible asset? b. According to ASC Topi 805 Business Combinations, what is the measurement principle…

Extreme Inc. is a newly established enterprise. It was set up by an entrepreneur who is generally interested inthe business of providing engineering and operational support services to aircraft manufacturers. ExtremeInc., through the contacts of its owner, received a confirmed order from a well-known aircraft manufacturerto develop new designs for ducting the air conditioning of their aircraft. For this project, Extreme Inc.needed funds aggregating to $1 million. It was able to convince venture capitalists and was able to obtainfunding of $1 million from two Silicon Valley venture capitalists. The expenditures Extreme Inc. incurred inpursuance of its research and development project follow, in chronological order: • January 15, 20X5: Paid $175,000 toward salaries of the technicians (engineers and consultants) • March 31, 20X5: Incurred $250,000 toward cost of developing the duct and producing the test model • June 15, 20X5: Paid an additional $300,000 for revising the ducting process…

Ahorita Company manufactures wireless transponders for satellite applications. Ahorita has recently acquired Zelltech Company, which is primarily known for its software communications development but also manufactures a specialty transponder under the trade name “Z-Tech” that competes with one of Ahorita’s products. Ahorita will now discontinue Z-Tech and projects that its own product line will see a market share increase. Nonetheless, Ahorita’s management will maintain the rights to the Z-Tech trade name as a defensive intangible asset to prevent its use by competitors, despite the fact that its high-est and best use would be to sell the trade name. Ahorita estimates that the trade name has an internal value of $1.5 million, but if sold would yield $2 million. Answer the following with supporting citations from the FASB ASC:a. How does the FASB ASC Glossary define a defensive intangible asset?b. According to ASC Topic 805, “Business Combinations,” what is the measurement principle…

AMT, Inc., is considering the purchase of a digital camera for maintenance of design specifications by feeding digital pictures directly into an engineering workstation where computer-aided design files can be superimposed over the digital pictures. Differences between the two images can be noted, and corrections, as appropriate, can then be made by design engineers. Solve, a. You have been asked by management to determine the PW of the EVA of this equipment, assuming the following estimates: capital investment = $345,000; market value at end of year six = $120,000; annual revenues = $120,000; annual expenses = $8,000; equipment life = 6 years; effective income tax rate = 50%; and after-tax MARR = 10% per year. MACRS depreciation will be used with a five-year recovery period. b. Compute the PW of the equipment’s ATCFs. Is youranswer in Part (a) the same as your answer in Part (b)?

Solution Summary: The author explains that Company I manufactures miniature micro wave frequency receivers and transmitters used in mobile internet and other communication applications.

Videos

Want to see the full answer?

Chapter 15 Solutions