Essay on Linear Technologies Case Solution

1784 Words Jan 6th, 2015 8 Pages
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
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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…