Linear Technologies Essay

Decent Essays
Case 1 Linear Technologies
Group 15

2006120001 김현섭
2006120124 이 진
2007120155 김진현
2007120262 김효선

Three main issues arise when it comes to dividend policy in firms. The first issue is whether dividend is needed or not and the second issue is regarding which one would be the best option among various payout methods. Lastly, the third issue is about dividend rate. Whether these issues will affect corporate values has been debated over the years. This paper will talk about such issues through the case study of Linear Technology.
1. Why dividend is needed.
Linear Technology’s payout policy, unlike many competitors in the Semiconductor Industry, has a relatively large portion in dividends. Linear has provided steady dividends
…show more content…
Since the firm’s stocks are growth stocks, the cash used to repurchase stocks lacks the opportunity of generating high cash flows. Accordingly, the market price would result in decreased future earnings, EPS, and the firm value of Linear. The number of outstanding shares, instead of the price, will decrease. While the price of stock would increase just as the amount of cash paid out to repurchase the outstanding stocks. It is important that in both cases, earnings and earnings per share before the payment are not affected.
3. About the dividend rate
Firms judge the rate of dividend initiations by earnings. However, simply put, if dividend rate changes depending on the change of earnings, the fluctuation of dividend will increase. This would not be good. Because cutting dividends means uncertain future cash flows. If a company cuts dividend rate, shareholders will need higher opportunity costs of capital, as a result stock prices will go down. Thus, Linear has retained constantly increasing dividend rates in small amounts. Under the theoretical assumptions such as M&M, there is no difference whether firms pay out dividends or not. And if the cost of capital is lower than a firm’s ROE, no dividend can raise a firm’s value. However, considering the real-life factors, firms should keep on steady level of dividend rate or repurchasing shares. Repurchasing shares seems to be a better solution. As a
Get Access