Linear Technology

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Linear Technology Prof. Kanagaraj Prashant Sinha 2010PGP256 The case presents a decision to be made by the management of the company Linear Technology about their dividend policy. The company went public in the year 1986 and is the seventh largest company by market capitalization in the SOX. The company split its stock four times since going public. Linear declared its first dividend on October 13, 1992. The quarterly dividend was set at $0.05 per share. They have to decide whether to increase their dividend since they are sitting on a lot of cash reserves. They can alternatively also repurchase their shares with the cash. The company has to analyse both these options to determine which is a better decision for the company and will enhance value of the shareholder. From the tax perspective the by not returning cash to its shareholders, Linear Technology is saving the double tax which is levied on dividend amounts paid to shareholders. Even though the company has to pay the corporate tax on EBIT, it saves the personal tax levied to shareholders on dividend amount. The tax outflow saved is around $1.87 -$2.8 million. This tax can be saved by keeping the cash inside the firm or by exercising a repurchase option which is used to offset the dilution of shareholding through employee stock options. From the stock price perspective paying a dividend reduces the firm value by reducing the assets. The earnings and the EPS remain same. The effect of paying dividend of 1565.2 will lead to a change in the stock price of $26.61. On the other hand repurchase causes the price of the dividend to rise as the number of outstanding shares reduces although the cash is reduced. The EPS also increases as a result of the share repurchase. This increase in the share price leads to the value of the firm appreciating from $3.44 billion to $3.58 billion. The earnings would remain the same. The firms could go in for dividends when they want to reward their shareholders and the excess cash that they have is not required for re investing in the business because the growth is slowing down. With respect to cash management the company strategy was to be very conservative in terms of dividend payout by setting it at a low level initially so that a situation did not arise where it was not capable to pay dividend to its shareholder. LT's average payout ratio over the last decade was 13% and its dividend yield was 0.37 %, both being respectable with respect to the semiconductor industry. Linear technology currently is carrying cash in excess of $1.5 billion which could be utilized by them to finance new fabrication facilities that require an investment of $200 million which would enable them to continue innovating and expanding into new markets. From the analysis it can be concluded that is more beneficial for Linear Technology to use its excess cash flow by them to finance new fabrication facilities that require an investment of $200

million which would enable them to continue innovating and expanding into new markets. It can also use the cash flow for share repurchase as it adds more value to the firm and leads to increase in the price of the stock which is additional motivation for the employees. Paying dividends would have a negative effect in terms of the value of the form and the stock price

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