Linear Technology Essay

678 Words Jun 2nd, 2011 3 Pages
1. Describe Linear Technologies payout policy.

Linear Technology announced its first dividend on October 13, 1992 in order to portray Linear Technology as a less risky firm than other technology companies that did not pay dividends and to gain access to new investors interested in earning income in addition to investing in growth. Linear Technology initially planned to begin with a relatively low dividend of $0.05 per share which amounted to a 15% earnings payout ratio – mindful of the fact that investors abhorred firms that reduced or stopped their dividend payment schedule. Beginning more conservatively than their original estimates, Linear Technology began with a $0.00625 dividend per share. Linear Technology has steadily increased
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When the dividends tax is higher than the capital gains tax, the optimal dividend policy is to pay no dividends. In this situation, the firm will use share repurchases instead in order to take advantage of tax savings. Before the tax cuts, the firm has less incentive to raise funds for dividend payouts due to the higher tax rate on dividends and the negative effect on shareholders. However, with the equalized tax rate of 15%, the firm is no longer discouraged from raising dividends.

3. IF Linear were to pay out its entire cash balance as a special dividend, what would be the effect on value? On the share price? On earnings? On earnings per share? What if Linear repurchased shares instead? Assume a 3% rate of interest.

4. Why do firms pay dividends? Why has the rate of dividend initiations changed over time?

Firms pay dividends for several reasons despite the MM proposition that characterizes dividend policy as irrelevant. One main reason for dividend policy is based on the manager’s belief that investors prefer stable dividends with sustained growth. This kind of dividend signals to the investor the firm has reached a steady state growth i.e. a mature market position. A company usually only begins to consider releasing dividends once it has established regular and predictable operations cash flows. However, dividends can also act as a negative signal telling investors that the firm’s growth rate is slowing. Increasing the dividend

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