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

Question

Electronic Timing, Inc. (ETI) is a small company founded 15 years ago by electronic 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 signal or clocks necessary synchronize electronic systems. Its clock products originally were used in PC video graphics applications, but the market subsequently expanded to include motherboards, PC peripherals devices, and other digital consumer electronics, such as digital television boxes and game consoles. ETI also designs and markets custom application-specific integrated circuits (ASICs) for industrial customers. The ASICs design combines analog and digital, or mixed signal, technology. In addition to Ton and Jessica, Nolan Pittman, who provided capital for the company, is the third primary owner. Each owns 25 percent of the one million shares outstanding. The company has several other individuals, including current employees, who own the remaining shares. Recently, the company designed a new computer motherboard, The Companys design is both more efficient and less expensive to manufacture, and the ETI design is expected to become standard in many personal computers. After investigating the possibility of manufacturing the new motherboard, ETI determined that the cost involved in building a new plant would be prohibitive. The owners also decided 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 $30 million.

Please answer all 6 questions:

1. Tom believes the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the stock price and company value?

2.Jessica believes that the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Jessica's proposal affect the company?

3) Nolan is in favor of a share repurchase. He argues that a repurchase will increase the company's P/E ratio, return on assets, and return on equity. How will a share repurchase affect the value of the company?

4. Another company option discussed by Tom, Jessica, and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?

5. One way to value a share of stock is the dividend growth, or growth perpetuity, model. Consider the following: The dividend payout ratio is one minus b, where b is the retention or plowback ratio. So the dividend next year will be earning next year, E1, times one minus the retention ratio. The most commonly used equation to calculate the sustainable growth is the return on equity times the retention ratio. Substituting these relationships into the dividend growth model, we can get the equation to calculate the price of a share today. Explain what are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand it manufacturing capability?

6.Does the question of whether the company should pay a dividend depend on whether the company is organized as a corporation or an LLC?

Explanation / Answer

Ans:1 Special dividend will increase the share price before the Ex dividend date but after declaration of dividend the Share price will fall by the amount of Special dividend and More in some cases. Company value will also decline as we pay the special dividend the reserves will be reduced and that will reduce the value of the company.

Ans:2 Jessica's Proposal to Pay off Debt sounds good as this will reduce the interest burden of the company and also increase the productivity of the company if the manufctuirng facilty is expanded and upgraded.

Ans: 3 Share repurchase will have positive effect on Price Earnings ratio as well as return on Equity and Return on Assets so the company valuation will also improve however there will be a cash outflow.

Ans: 4 To begin with regular dividend payment is also a good option as dividend growth will have positive effect on the share price of the company and will increase the value of the enterprise. It will also not have full cash outflow at one go.

Ans:5 In case od Dividend growth Model the Dividend Payout ratio will increase the share price whereas in case of upgradation or expansion the price will remain more or less same.

Ans:6 Yes it depends on whether the company is organised as as a corporation or an LLC if the company is a corporation then he can declare and pay the dividend whereas in case of Limited Liability Company members can not receive the dividend

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