Question

Electronic Timing, Inc., (ETI), is a 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 application-specific 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 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 sales of the motherboard design were completed for an aftertax payment of $ 30 million.

A. 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?

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

c. Noland 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?

d. Other options discussed by Tom, Jessica, and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?

Answer 1

1. sometimes while paying special dividend the stock prices may fall by that amount. So, if Tom will use the extra cash to pay the special dividend it will reduce the reserve of the company thus decreasing the value of the company.

2. Jessica's proposal sounds good because if the debt will get reduced then there will be less burden on the company and if the existing manufacturing capacity will get an upgrade and expand it will increase the productivity of the company also.

3. Noland's suggestion is also good because if the company repurchases the share then it will increase the company's P?E ratio, ROE, and return on assets.

4. this option is also very effective because if there will be regular dividend payments to the shareholders it will increase the growth rate of dividends and thus increasing the stock price of the company and attract more shareholders.