Case study google payout policy

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Question 4 Case Study: Google's Payout Policy
Read: Payout Policy at Google Case on the next page and answer the following questions

a.) What are Google's financing needs? Will it need the $20 billion in cash?

b.) Why do firms pay dividends? What are the disadvantages of paying dividends? How do these considerations change if the payout is a share repurchase?

c.) If Google were to pay $20 billion as a special dividend, what would be the effect on market value? On the share price? On net income? On earnings per share? What if Google repurchased shares instead? Assume a 1% rate of interest on any cash balance and a 3% interest rate on the debt. Also assume that the deal takes place in early October 2014. Estimate the impact on the Sept. 30, 2014 balance sheet and the income statement for the next 12 months. (HINT: Solve this problem in the Modigliani-Miller setting, and think qualitatively about what would change in the real world.)

d.) What should Patrick Pichette recommend to Google's board?

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