Case report for Linear Technology

This signals that the excess cash was not highly utilized in the past although it already paid out dividends to its shareholders in 1996. This excess cash can be used for future projects and investments of the combined firm after acquisition.

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.

1. Discuss the nature of stock as an investment. Do most stockholders play large roles in the management of the firms in which they invest? Why or Why not?

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

Kieso, D. Kimmel, P. 2008) The income statement and owner’s equity statement both reflect the same time period. The format will normally consist of the owner’s equity amount then investments, net income, and lastly owner’s drawings. For Lowes, the ending balance for February 01, 2014 showed two billion four hundred and ninety- six million dollars. They had a decrease of three hundred and five million dollars in share repurchases, meaning Lowes did not buy back their own stock. Normally share repurchase is “a flexible way to return money to shareholders.” (Weygandt, J. Kieso, D. Kimmel, P. 2008) Also, there was a decrease of cash dividends declared on common stock of one hundred and twenty- seven million dollars. Cash dividends are “distributions of net income by the company.” (Weygandt, J. Kieso, D. Kimmel, P.

Dividends should be made cumulative and issuable upon a liquidation event or an IPO. Such dividends may be converted, if the holder desires, to common shares. This will encourage management to seek a quicker exit.

The four options for dividend disbursement that FPL has are to first to keep the dividends at the status quo of 1.6%, second to slower the dividend growth to 1%, third to freeze dividend, and last to reduce or eliminate the dividend completely. When analyzing the first option, which is the keep the dividends at an increasing 1.6% per year, exhibit TN-4 shows that dividend payouts do increase from $468.38 million in 1994 to $499.08 million in 1998 with a resulting negative net cash after dividends every year till 1997 when cash is $110 million and 1998 when cash is $102 million. The payout ratio however does reduce to 84% by 1998.

Dividend Policy | -Pay out dividend to shareholders in profitable period | -100% plowback to reinvest in the business |

Support: The inventory increase in 1997, YOY, was 58%. Additionally, the COGS to revenue ratio reduced from to 72% in 1997. This combination of increase in inventory and reduction in COGS as a percentage of revenue seems to indicate that the fixed costs may have been spread over a larger base through over production, thereby causing the COGS to reduce. This may be a cause for concern and could be a potential red flag.

In practice, dividend policy will be affected by taxes as tax rates for different categories of investors will differ. Also, a firm’s dividend policy is perceived by the financial markets to be a signaling mechanism. A cut back in dividends may signify that the firm perceives tough

It has the option to distribute the cash in the form of dividends. Shareholders were taxed on cash dividends at ordinary income rates whereas gains realized on shares that were repurchased received capital gains treatment.

The fact that shareholders are taxed twice through this repayment methodology infers that dividends are not their repayment technique of choice. Furthermore, paying out cash reserves through dividends also has the effect of both reducing the company’s assets and also inhibited the company’s ability to fund future growth as Dividends reduce the company’s retained earnings.

Based on the financing needs, as above dividends would be additional stretch on company finances

However, because the interest of debt could shield part of earnings from taxes and strengthen management’s incentive to increase sales. Some financial analysts hold the view that companies should take appropriate debt. The tax expense could be decreased along with the increase of debt.

While conducting the analysis of EMI group’s dividend policy, one factor that stood out to us was the clientele effect. The clientele effect shows us who holds most of our outstanding shares. High tax-bracket individuals would prefer zero-to-low dividend payout to save on taxes. Low tax-bracket individuals would prefer a low-to-medium dividend payout, which gives them additional income while helping them save on taxes. An investing corporation would prefer a higher dividend payout because if they own a significant amount of shares, say 1 million, the income stream from that dividend would provide the company with more monetary resources while benefitting from tax exemptions. So before setting a dividend policy for EMI group, we must first