Linear Technologies Essay examples

Decent Essays
Describe the payout policy of Linear Technologies historically. Describe Linear’s current cash position and its financing needs.

The company initiated its dividend in 1993 with a relatively conservative payout ratio of 15%, based on a quarterly dividend of $0.05/share/quarter ($0.00625 split adjusted as per Exhibit 3). As of 3Q2003, the dividend is also $0.05/share/quarter, adjusted for stock splits, which translates into a payout ratio of . The payout ratio is currently 27.5% on an as adjusted basis. The payout ratio reached 10% in 2001, when EPS was at a record high. On an adjusted basis, Linear Technologies has consistently increased its dividend each year. Since 2000, the dividend increases have been $0.01/share/quarter each year.
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This reduction in equity value would be reflected as a $4.80/share decrease in share. In the twelve months post-dividend, net income would decrease by $45mm due to decreased interest income on the $1.5bn of cash. This reduction in net income would decrease EPS by $0.144/share.

If instead, Linear Technologies used the $1.5bn of cash to repurchase stock on the open market, it could purchase 48.6mm shares (15.6% of outstanding share count) assuming a market price of $30.87. The total market equity value of the company would decrease by $1.5bn as well. Earnings per share would be impacted in the following manner:

〖EPS〗_(Pre Buyback)= 〖EPS 〗_(3Q2011 YTD)* 4/3=0.55*1.33=$0.733

〖EPS〗_(Post Buyback)= (〖Net Income〗_(Prior to Adjustment)-Reduced Interest Income)/(〖Share Count〗_Original- 〖Shares Repurchased〗_ )= (227.5 - 45.0)/(312.4 - 48.6)= 182.5/263.8=$0.692

What are the tax consequences of keeping cash inside the firm? Of paying it out as a dividend? Of using it to repurchase stock?

If the company keeps the cash in the firm, Linear Technologies will pay taxes on the interest income it earns. This will be approximately $15.75mm (assuming 35% tax on interest income of 3% from $1.5bn of cash).

If Linear decides to payout the $1.5bn of cash as a dividend the shareholders, but not the company, will be taxed upon
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