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 …show more content…

First if investors are in the lower income tax bracket, they would save substantially by taking Linear’s cash and investing it themselves.
Secondly if LT invests in short term bonds it may not match the desires of the shareholders because they would want to invest in higher returning securities. This becomes more important when interest rates are very low. If LT distributes this cash to shareholders, they would be able to choose better investment opportunities that better match their risk preferences.
Thirdly, if LT keeps more cash, its agency costs will increase. Therefore it is wise that LT returns excess cash. LT should only keep enough to invest in +ve NPV projects and also hedge to save itself against future business risks. Moreover, returning the extra cash could increase share prices because of increased faith of the investors.
Lastly, if LT pays the cash in the form of dividends it would bring in investors who gain income from dividend paying stocks. This would also attract European funds that have dividend requirements.

3) If Linear were to pay out its entire cash balance as a special dividend, what would be the effect on value? On the share price? On earnings? On earnings per share? What if Linear repurchased shares instead? Assume a 3% rate of interest.
To arrive