Linear Technology

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

Linear Technology Corporation (“LLTC” or the “Company”), headquartered in Milpitas, California, was founded in 1981 by Robert Swanson. LLTC designs, manufactures, and markets a broad line of analog integrated circuits (“IC”) (semiconductors) worldwide. LLTC’s linear circuits are used in various electronic applications, such as cellular telephones, digital cameras, complex medical devices, and navigation systems. LLTC focuses on the analog segment in the semiconductor industry and has moderate-to-high exposure in the communications industry and computer industry, which, in 2002, accounted for 33% and 27% of LLTC’s total sales, respectively. The automotive industry accounted for 6%, and the remaining 34% was spread across various industries. LLTC’s customer base is well-diversified and no single customer accounts for even 5% of its business. The capital investment in the analog IC industry is modest. The cost of a new analog fabrication facility (“fabs”) is approximately $200 million, substantially lower than the cost of a digital fab built by Intel, which can be as high as $2 billion. Once built, the useful life of analog fabs can be over 10 years, while digital fabs often become obsolete in three to five years. Research and development (“R&D”) is also modest as observed in the fact that LLTC’s R&D peaked at $102 million in 2001 .

The number of shares outstanding will remain the same and thus, the only change in the equity side of the balance sheets for the next three years will be the change in the amount of retained earnings. This change will be equal to the net income of the company for last year because the company will not pay a dividend.

6. The financial riskiness of SciTronics increased between 2005 and 2008 as demonstrated by its higher debt-to-equity ratio. However this does not seem to pose a problem for the company as it actually managed to improve its margin of protection for creditors (it is now able to generate $13 in income for each $1 of interest, versus a previous 10 times interest earned).

Pro-forma income statement and key credit rating determinants are shown in Exhibit 2 and 3 respectively. Remaining share no. of 158.3m after repurchase is based on proportional value addition distribution between cash-out and remaining shareholders and this number is inserted to calculate earning per share and corresponding immediate share price change after announcement of repurchase program. According to Exhibit 3 and industrial average of relevant grades, only fund flow/ total debt and total debt/ capital measures are not comparable with A credit rating. Considering EBIT and EBITDA interest coverage are two most important criteria and equity market value is so substantially different from book value which leads to a healthy

Management considering share repurchase program should weigh its benefit of financial discipline, efficient corporate strategy implementation and utilization of tax shield against the downside of cost of financial distress. It’s not the possibility of bankruptcy that causes concerns among equity holders regarding extent of leverage but the direct costs (legal, liquidation, administrative etc.) and indirect costs (deteriorated corporate image, management time and attention, agency costs of value-destructing investment, distress asset sales etc.). Exhibit 4 lists the key assumption inputs of approximating quantitative firm value/ equity value accretion. Levering UST to a larger extent by adding $1,000m does increase firm value.

Because firm value will rise to $6,850.8 million immediately after the recapitalization announcement, original shareholders will capture the full benefit of interest tax shield since they are able to sell their stocks at a higher price. The new stock price is determined by dividing the value of the levered firm by the number of shares outstanding at the end of 1998. Since there were 185, 516,055 shares outstanding at year end 1998, the new stock price after the announcement of recapitalization would be $6,850.8 million divided by 185, 516,055, which is $36.93. Compared to the

Because often dividends are perceived as spendable income (some stock holders look at stocks as a source of income as it is easier to get a dividend instead of selling the stocks). Sometimes investment opportunities are low, they reach the limit of their marketplace, so companies decides to distribute cash in the form of dividends. For some companies it is a way of showing that the company is stable financially and can fulfill the commitment of paying out a dividend. Also it is a way for companies to mitigate agency problems when they have excess cash.

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.

First, a large share repurchase will significantly increase shareholders’ percentage ownership of BKI. BKI has been under levered for decades. The company acquisitions of several small manufacturers made shareholders’ equity be diluted even more. In other words, shareholders, especially the main shareholders in Blaine’s board, are paying for BKI’s over-liquidity. This share repurchase will not only give the board more flexibility to allot dividends, but will lead to a stable development of BKI’s business in the long run.

1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock. Which of these three elements is Eastboro management willing to vary, and which elements remain fixed as a matter of policy?

The repurchase program increases the shareholder’s value. This is because of a rise in the price of the shares of the original shareholders.

Once a company makes a profit, they must decide on what to do with those profits. They could continue to retain the profits within the company, or they could pay out the profits to the owners of the firm in the form of dividends. Once the company decides on whether to pay dividends, they may establish a somewhat permanent dividend policy, which may in turn impact on investors and perceptions of the company in the financial markets. What they decide depends on the situation of the

Paying dividends will reduce the available funds of the company but is a way to increase shareholder value. Increasing or decreasing of DPR spells out the standing of the company to its shareholders. Reduction or not giving dividends for a period will reduce AFN but will mean that the company is struggling to provide enough profit. Shareholders may see this as a signal that further investments for the company are riskier.

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.