Linear Technologyâs payout policy can be observed from Exhibit 3. From Q1 93 onwards, Linear has been steadily paying out dividends every quarter. Over the years, the dividends paid out to shareholders have also increased. From the dividend payout ratio (Appendix, Table 1), it is evident that especially in 2002 to 2003, dividends being distributed have increased from its previously steady ratio of approximately 0.100. Dividends in both years have increased despite the fall in net income.
There were stock splits for Linear in 1993, 1996, 1999 and 2000. This meant that the residual shares owned increased, and that shareholders can then receive more ...view middle of the document...
3%. Yet, investors in this sector, Information Technology, generally expect a return on book equity of 14.9% (Exhibit 5).
Keeping the cash in the firm in the form of retained earnings will lead to capital gains for investors upon sale of the stock. As the majority of shareholders of Linear are institutional investors, it is likely that they hold the stock for a long period, thus incurring the rate of 20% for long-term capital gain for taxpayers in the highest tax bracket. Should the bill be passed, the capital gains tax rate would be 15%. This rate is prior to the passing of the Bill put forward by the
Dividend Policy at Linear Technology (spreadsheet of case exhibits available on Blackboard)
1. What is Linear Technology’s dividend payout policy? Do they seem to have a long-run target payout ratio with a partial dividend adjustment process?
2. What is Linear Technology’s cash balance in 2003, and assuming this balance, a risk-free interest rate of 3%, a corporate tax rate of 35%, how long could they fund a $0.06 per share quarterly dividend?
3. What is the historical context of tax rates, market to book ratios, and dividend initiation rates as shown in Exhibits 7, 8 and 9? How are these relevant to Linear Technology’s decision?
4. What are the tax consequences of keeping the cash inside the firm using a MM framework? Using the formula relating municipal and corporate bond rates, that is rmuni = rcorporate(1 – tp), what is the implied tp from Exhibit 8?...