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Dividend policy at Linear Technology

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Introduction

´╗┐Question 1 ________________ Linear Technology?s payout policy can be observed from Exhibit 3. From Q1 93 onwards, Linear has been steadily paying out dividends every quarter. Over the years, the dividends paid out to shareholders have also increased. From the dividend payout ratio (Appendix, Table 1), it is evident that especially in 2002 to 2003, dividends being distributed have increased from its previously steady ratio of approximately 0.100. Dividends in both years have increased despite the fall in net income. There were stock splits for Linear in 1993, 1996, 1999 and 2000. This meant that the residual shares owned increased, and that shareholders can then receive more dividends. However since dividend payout ratio remained fairly stable, this reflects greatly on Linear?s strong earnings. Question 2 ________________ Linear Technology has no financing needs, given its large cash balance of US$1.565 billion in 2003 and positive net cash flow from 1992. Net income has also been positive since 1992, with net income in the first 3 quarters of 2003 at US$170.6 million. Current liabilities stand at US$135.6 million[1], and long-term liabilities at $97.5 million. Accounts receivable as at March 2003 was at $83.6 million, current assets at $1.741 billion, leading to total assets of $2.031 billion. ...read more.

Middle

Also, in this case, the payment of dividends is unlikely to affect future earnings and profitability. Furthermore, since the payment of cash dividends does not involve a change in the number of shares, earnings per share would not be changed. If Linear repurchased shares at market price instead, market value of equity would be also reduced, but the share price would not be changed. But in some cases, share price might be increased by signalling theory, as the buyback of shares may indicate that management feels that the share is undervalued. Similarly, earnings would not be changed, but earnings per share would be increased from the reduction in number of shares. The results are summarized in Table 3 (Appendix). Question 4 ________________ A dividend is paid to shareholders through cash or shares as a return of profit for holding the stock. Firms may also choose to issue dividends in order to compete against other firms in the market for investor's money. There are many reasons for the change in rate of dividends. The first reason is due to competitors where the firm must change its rate in order to compete with competitor changes in dividends. Competitors in the market may push for higher dividends in years where the economy is doing better and lower their dividends in poor economic times. ...read more.

Conclusion

15% capital gains tax on sale of stock Share repurchase Gains treasury shares for use in stock options Positive signals to investors Lower cash balance Gains treasury shares for use in stock options Positive signals to investors Lower cash balance Stock price remains the same 1. 20% capital gains tax on sale of stock Stock price remains the same 1. 15% capital gains tax on sale o stock Special cash dividend Attracts more investors Lower cash balance Attracts more investors Lower cash balance Stock price falls by amount of dividend Tax on dividends 1. 38.6% Stock price falls by amount of dividend Tax on dividends 1. Viewed as return of capital gain, 15% ________________ Calculations for Question 3 Dividend payout ? Change in share price Share repurchase ? Change in Earnings per Share Table 3: Effects of Special Dividend and Share Repurchase Share price Earnings Earnings per share Special dividend $25.86 $170,600,000 $0.55 Share repurchase $30.87 $170,600,000 $0.65 ________________ Endnotes ________________ ________________ [1] Linear Technology. (2003). Linear Technology Corporation Consolidated Condensed Balance Sheets. http://cds.linear.com/docs/Investor/Linear_Technology_Earnings_PR_FY2003_Q3.pdf [2]MSCI Inc. (n.d).Global Industry Classification Standard (GICS). http://www.mscibarra.com/resources/pdfs/GICSSectorDefinitions.pdf [3]Krawczyk, K. and Wright, L. (Oct 2004).Dividends and Capital Gains Planning After the 2003 Tax Act. http://www.nysscpa.org/cpajournal/2004/1004/essentials/p36.htm [4] Taylor, J. (2002). Corporation Income Tax Brackets and Rates, 1909-2002. http://www.irs.gov/pub/irs-soi/02corate.pdf [5] Pettit, J. (2001). Is a Share Buyback Right for You? http://hbswk.hbs.edu/archive/2233.html [6] Mueller, J. (2009). Dividend Facts You May Not Know. http://www.investopedia.com/articles/stocks/07/dividend_implications.asp#axzz27S3Elt2p ...read more.

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