Electronic Timing, Inc. (ETI), is a small company founded 15 years ago by electr

Question

Electronic Timing, Inc. (ETI), is a small company founded 15 years ago by electronics engineers Tom Miller and Jessica Kerr. ETI manufactures integrated circuits to capitalize on the complex mixed-signal design technology and has recently entered the market for frequency timing generators, or silicon timing devices, which provide the timing signals or "clocks" necessary to synchronize electronic systems. Its clock products originally were used in PC video graphics applications, but the market subsequently expanded to include motherboards, PC peripheral devices, and other digital consumer electronic, such as digital television boxes and game consoles. ETI also designs and markets custom application-specific integrated circuits (ASICs) for industrial customers. The ASIC's design combines analog and digital, or mixed-signal, technology. In addition to Tom and Jessica, Nolan Pittman, who provided capital for the company, is the third primary owner. Each owns 25 percent of the 1 million shares outstanding. Several other individuals, including current employees, own the remaining company shares. Recently, the company designed a new computer motherboard. The company's design is both more efficient and less expensive to manufacture, and ETI design is expected to become standard in many personal computers. After investigating the possibility of manufacturing the motherboard, ETI determined that the cost involved in building a new plant would be prohibitive. The owners also decided to an outside that they were unwilling to bring in another large outside owner. Instead, ETI sold the design to an outside firm. The sale of the motherboard design was completed for an after-tax payment of $30million. 5. One way to value a share of stock is the dividend growth, or growing perpetuity, model. Consider the following: The dividend payout ratio is 1 minus b, where b is the "retention" or "plowback" ratio. So, the dividend next year will be the earnings next year, E1, times 1 minus the retention ratio. The most commonly used equation to calculate the sustainable growth rate is the return on equity times the retention ratio. Substituting these relationships into the dividend growth model, we get the following equation to calculate the price of a share of stock today: What are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain.

Explanation / Answer

1. Answer: The Company needs to be very careful in dispensing its extra cash as dividend. As dispensing extra cash as dividend can lead to decrease in the prices of the stock. Issuing the extra cash as a dividend would mean that the shareholders collectively will probably drop by the same amount because of the transfer of wealth from the company to the shareholders individually. Hence, the economic value of the company will also decrease.

2. Answer: The proposal proposed by Jessica will help in supporting the expansionary policy for the company which can result to a higher growth rate for ETI. As the company is not issuing dividends out of the extra cash so it should plan in expanding its manufacturing capabilities. This will help in the growth of the company.

3. Answer: A share repurchase should be equivalent to the issuance of a cash dividend with the same amount as regards to effects on shareholders' wealth. The way the share repurchases should be done in a way that it does not diminish or create shareholder wealth. Hence, Nolan's argument that the company's return and assets and return on equity will increase company

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