Case report for Linear Technology

1640 Words7 Pages
The main purpose of the report is to make a decision for Linear Technology on dividend policy. The report analyzed the impact of changing future dividend policy on the value of the company, based on its historical performance, financial history and market trends.

Linear Technology is a large-scale company which focus on the analog segments within semiconductor industry. It went public in 1986 and announced its dividend policy on 1992. Nowadays, under the market environment where dividends are unwilling to be paid, Linear still insisted its dividend commitment.

Now Linear Technology is experiencing some difficulties with its profits that its quarter sales number in 2003 was far below that in last fiscal year, despite some growth.
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This encourage the Linear to use cash balance to buy back their shares. At last, Linear did not plan to make acquisitions and it had over $1.5 million cash and short-term investment in recent years. Therefore Linear should return some cash to its shareholders due to the advantages discussed above.
What are the tax consequences of keeping cash inside the firm?
Linear would pay the corporate tax for earnings no matter the company chose to keep the cash or give it out. And if linear offered dividend, the shareholders had to pay for the dividend tax, meaning shareholders paid double taxes. Considering the proposal raised by President George W Bush in January 2003 that the taxes of dividends can be eliminate if they were paid out of earnings that had already been taxed and the capital gain tax is still required, the shareholders would benefit from saving dividend tax as if the company decided to offer dividend. Therefore the proposal would encourage the company to return cash to the shareholders.
I would like to add sth. to your answer. Basically about why keeping money in the firm does no good. Please look at the content below and choose do or do not add these in the answer : )
If the cash is kept in the firm, there are chances that these capitals will be reinvested and bring the Linear Technology potential benefit from tax shield and interest earnings. Thus, a part of the opportunity costs of paying dividend will be a deduction of tax by the nature of debt

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