Linear Technologies Case
BUSE 35200.82 – Corporation Finance
Professor Amit Seru
Linear Technologies Case
“I pledge my honor that I have not violated the
Chicago Booth honor code for this assignment”
Viral Patel
1. Linear’s historical payout policy has been to pay a quarterly dividend of $0.05/share and use any additional funds to repurchase shares to increase shareholder value. This kept their payout ratio to around 15% until about 2002 where this dividend payout moved the ratio to around 25% to 30%. Currently Linear is sitting on a large amount of cash ($1.5b) that they are investing in very low return securities. They currently don’t have any investment opportunities available so they are considering using this money to payout a one time dividend.
2. The current value of the firm can be calculated by multiplying the share price in Exhibit 3 by the number of shares:
V = 30.87 x 312.4m = $9,643m
If Linear paid out a one time dividend we would expect the value of the firm to go down by exactly the value of the dividend payment or $1.5b. As the value has gone down by that amount, we would take the new value of $8,143m and divide it by outstanding shares of 312.4m to determine a new share price of $26.07. We’d also expect earnings to decline by the interest income that Linear is making on its cash or 3% of $1.5b or $45m. Based on the current shares outstanding this reduces earnings/share by $0.144 for the foreseeable future.
If Linear repurchased shares you would expect the value of the firm to decrease by the same amount as the dividend payout but the share price should remain unchanged because now by repurchasing shares you have reduced shares by the value of the cash. You would expect the same decrease in earnings and earnings/share as a dividend payout as the firm is no longer able to receive income from it’s additional cash.
3. The tax implications of keeping it inside the firm is that the firm will continue to get taxed on it’s interest income at a
Professor Amit Seru
Linear Technologies Case
“I pledge my honor that I have not violated the
Chicago Booth honor code for this assignment”
Viral Patel
1. Linear’s historical payout policy has been to pay a quarterly dividend of $0.05/share and use any additional funds to repurchase shares to increase shareholder value. This kept their payout ratio to around 15% until about 2002 where this dividend payout moved the ratio to around 25% to 30%. Currently Linear is sitting on a large amount of cash ($1.5b) that they are investing in very low return securities. They currently don’t have any investment opportunities available so they are considering using this money to payout a one time dividend.
2. The current value of the firm can be calculated by multiplying the share price in Exhibit 3 by the number of shares:
V = 30.87 x 312.4m = $9,643m
If Linear paid out a one time dividend we would expect the value of the firm to go down by exactly the value of the dividend payment or $1.5b. As the value has gone down by that amount, we would take the new value of $8,143m and divide it by outstanding shares of 312.4m to determine a new share price of $26.07. We’d also expect earnings to decline by the interest income that Linear is making on its cash or 3% of $1.5b or $45m. Based on the current shares outstanding this reduces earnings/share by $0.144 for the foreseeable future.
If Linear repurchased shares you would expect the value of the firm to decrease by the same amount as the dividend payout but the share price should remain unchanged because now by repurchasing shares you have reduced shares by the value of the cash. You would expect the same decrease in earnings and earnings/share as a dividend payout as the firm is no longer able to receive income from it’s additional cash.
3. The tax implications of keeping it inside the firm is that the firm will continue to get taxed on it’s interest income at a