Reference no: EM131182508
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 electronics, such as digital television boxes and game consoles. ETI also designs and markets custom applicationspecific 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 Mini Case ros34779_ch19_581-620.indd 619 24/08/12 2:02 PM www.mhhe.com/rwj 620 Part IV Capital Structure and Dividend Policy 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 new 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 costs 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 aftertax payment of $30 million.
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? How will it affect the value of the company?
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 proposals 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. Are his arguments correct? How will a share repurchase affect the value of the company?
4. Another 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 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:
P0 = E1 (1 − b) _____________ RS − ROE × b
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.
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?
Financial forecast generates worst negative cash position
: Your three-year financial forecast generates a worst negative cash position of negative $625,000. Uncle John has committed to investing $250K. Given that, and the following facts, how much additional capital (beyond Uncle John’s $250K) do you need to..
|
Binomial tree model for a stock price
: In a 1-period binomial tree model for a stock price, S0 = 20, u = 1.06, d = 0.96, and r = 0.02 effective annual. There are no dividends. Note: T is omitted on purpose. If the price of a European Call option with K = 20 is $1.00: i) What is the risk-n..
|
Explain and offer the strengths-weakness-opportunities
: You are the administrator of a major regional not-for profit hospital. At the latest board meeting, certain members of the board noted that an increasing amount of the competitor hospitals are pursuing "other sources of revenue". Please explain and o..
|
Construct an arbitrage strategy
: Let S0 = 110, K = $98 and r = 8% cont compounded, T = 0.5, δ = 0. Let u = 1.3, d = 0.8 and n = 1 (1-period binomial tree model) a) Verify that the Premium of a European Put with above strike/maturity is $4.98. b) Suppose you observe a Put price of $6..
|
Use the extra cash to pay a special one-time dividend
: 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..
|
Annual payment stream assuming the current interest
: If you won a 1000.000 scratch ticket from the mass lottery and they offered you either 20 annual payment of $50,000 or a lump sum payment, how much would the lump sum have to be so that it is equivalent to the $50,000 annual payment stream assuming t..
|
What would be the net return of your proposal
: Rudy and Karyn come across an investment opportunity that offers them a guaranteed return. The couple is excited by the opportunity but they don’t have enough liquidity to put the cash forward the investment. How can you justify your proposal? What w..
|
Initial after-tax outlay or after-tax cost
: Opie, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future after-tax cash inflows from its project for years 1 through 8 are the same at $38,000. Opie uses the net present value meth..
|
Calculate the rate of return we make per annual
: We have a stock Cummings and Despotakis (C&D) which we buy for $100. We keep it for 6 years at which point we sell it for $250. During the six year period, it pays us $6 per annum, which we reinvest at 5% annual return. Calculate the rate of return w..
|