Case Study on "Dividend Policy at Linear Technology"

Case Study 15 pages (4207 words) Sources: 0 Style: MLA

[EXCERPT] . . . .

dividends of the Linear Technology are announced on annual basis which is the reflection of the fact that the organization has been a profit making institute, and has been able to generate the required revenue to ensue the smooth functioning of the organization. The attainment of the critical limit has made to possible for the stakeholders of the company to secure the dividends. There has been a general assumption by the finance scholars that the declaration of the dividends do not influence the firm value, which is because it does not offer any tax disadvantage to the investor, while offering an opportunity to the company for raising funds in the capital markets 'for new investments without bearing significant issuance costs'. The analysts are of the opinion that the dividend declared by the Link Technology is responsible for the depreciation of the stock value because of the tax disadvantage. However, the dividend declared by the company has received acclamation from the shareholders, and the trust between the directors of the company and the shareholders strengthen. The financial report of the company has revealed that, 'dividend declaration by Linear Technology is supportive for publicly traded firms to return cash or assets to their stockholders, they comprise only one of many ways available to the firm to accomplish this objective, in particular, firms can return cash to stockholders through equity repurchases, where the cash is used to buy back outstanding stock in the firm and reduce the number of shares outstanding'. The declaration of the dividends is an opportunity to offer their assets to the shareholders 'in the form of spin offs and split offs'.

Dividend Policy Description of Linear T

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echnology

The dividend policy is considered to be the 'controversial subjects' of finance, the scholars of the subject have been involved in extensive theorizing to analyze and explore the possibility for the declaration of the dividends. Several empirical models have been proposed and recommended for the explanation of the dividend behavior, and the Linear Technology has been engaged in the implementation of such models for the exploration and assessment of the dividends. However the driving policy towards the assessment of the dividend has remained unclear and complex, primarily due to the diligence of the process followed by the de-capitalization of the revenue, and owing to the clash of interest and reluctance in the public declaration of the achieved profits. The Linear Technology has adopted cautious stand towards the dividend policy, and has ensured that the declaration of the dividends does not affect the firm value. The economists are of the opinion that dividend and its frequency shall not to be considered on neutral on short-term basis; the Linear Technology has declared and manifested its dividend policy based upon the implementation of the policy of tight money. However, the management understands that negative relation between wage inflation and unemployment, and consider these factors into account prior to he declaration of the dividends, however the management further realized that 'money growth raises output in the short run which ought to be shared and delivered to the shareholders'.

A conclusion that can be reached that 'exogenous part' of the money influence the dividend rates and its frequency, on the basis of the assumption that the money responds to real variable, therefore the money supply has further overshadowed the liquidity effect on the dividend rates. However it is incorrect to regard the money as the appropriate measure of the policy towards the increase in the dividend rates, the dividend rates are based on the supply of bonds, and rate of dividend is regarded as the return on investment and bonds, through bonds the evaluation of the liquidity effect can be exercised. The measurement of the money can be exercised through the non-borrowed reserves; the purpose of injecting the money can not be achieved through the withdrawals. The injection of money can also be exercised through the purchase of long-term bonds, and this is expected to develop an impact on the short-term rates, which is expected to influence the dividend declaration process.

The stock market risk are associated with the occurrences when the allocation of the funds is granted towards any investment project, without any evaluation and analysis of the purchasing and selling price of the product afterwards. Such concerns are imminent because stock markets are considered to be incomplete and segmented. The risk within the stock market based on the declaration of the dividends is experienced when the company and the shareholders are willing to invest their resources in towards the investment plan. The Linear Technology has practiced a policy related to the estimation of the dividends based upon the long-term shares of the company, to facilitate the old and potent partners. The buyers are the expected beneficiaries when the dividend percentile is positive, the positive effect is based on the lower prices of the stocks as compare to the expected prices, and when the expected rate of return has been crossed. Therefore within the stock market business, the dealers are expected to make good fortune, and 'any real consequences are distributional because the shock has favored some agents at the expense of others'. The expansion and growth of the stock market is expected to determine the time period associated with the downgrade within the stock market, the time is considered to be major dimension, and the declaration of the dividends is based on the 'relationship between the indicators and the downgrade'.

The Bird-in-the-Hand Explanation

In Linear Technology, the relation between the market indicators which include rating changes, abnormal stock returns, and the proportion of equity owned by institutional investors and bank insiders and supervisory information have failed to explain the supervisory assessments and dividend percentile, and for this purpose the equity indicators have been ignored. It was reported that the 'shares spreads with particularly poor supervisory assessments reducing spreads and vice versa', therefore market is based on the market discipline i.e. supervisory assessments. It was investigated that market prices incorporate additional information as compare with the accounting variables, and therefore influence the ratings of the shares, however there is no variance in the future prospects and worth of the share, it is the debt market indicators which have predictive power to influence the performance and operations of the Linear Technology stocks. The Linear Technology takes into account the supply risk associated with the share market is associated with residual supply risk. In cases where there is heavy demand of the stock shares in the market, the demand in many of the cases is expected to surge due to the interests of the 'foreign financial institutions and international monetary authorities regarding whether to roll over their substantial and various holdings of shares, such decisions are expected to influence the residual supply of dividends which is provided to the 'remaining traders because they count against the issue quantity stated in the auction announcement'.

The factor persists as per which there is proportional relationship between the 'firm value and dividend payout', which is the representation of the relative factor to the share price appreciation. The Linear Technology considers the fact that the dividends are supposedly less riskier than the capital gains, therefore the company has to 'set a high dividend payout ratio and offer a high dividend yield to maximize stock price'. However, there is another perception with reference to the dividend policy of the company based upon 'a high dividend payout ratio which will maximize a firm's value the bird-in-the-hand fallacy'; however bird-in-the-hand explanation for dividend relevance is regarded as fallacious. The common belief is that the Linear Technology has considered the 'the riskiness of a project's cash flows, which subsequently determines the intensity of the potent risk vulnerable to the company', the general belief is that 'the increase in dividend payout today will result in an equivalent drop in the stock's ex-dividend price, thus increasing the dividend today will not increase a firm's value by reducing the riskiness of future cash flows'.

The Signaling Explanation

It is also believed that the Linear Technology has developed good reasons for the declaration of the dividends i.e. The significance and relevance of the dividend policy has been to reveal and disclose the information about the company's future prospects to investors. It is understandable that the reforms within the market price are expected to cause change in the rate of dividend. It has been observed through the information content of dividends or signaling explanation that in Linear Technology the 'cash dividends announcements have significantly conveyed the valuable information about management's assessment of the company's future profitability that other means cannot fully communicate'. It has been further observed that the information asymmetry has revealed the information advantage possessed by the corporate managers has provided them an edge over the outside investors. Assuming that the information possessed by the management solely can be used for changing the dividends 'as a way to signal this private information and thus reduce information asymmetry', however there is a possibility that the dividend declaration can… READ MORE

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Quoted Instructions for "Dividend Policy at Linear Technology" Assignment:

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20 page written case report, including spreadsheets. The report should begin with an executive summary that is one-half to one page long. It should be typed double spaced (using 11 or 12 font, preferably Times New Roman). It will have three basic components:

1. Statement of the problem. This section should contain a brief overview of the problem at hand. You may have to read the case carefully to identify the firm's most pressing problem. You should state the problem so it is clear that your presentation is addressing one main problem. Secondary problems should be discussed in the body of the case.

2. Discussion. Give a brief discussion of the main considerations, the consequences of failure to act and the alternative solutions you have considered. If there are other apparent solutions besides the one you are recommending, you will strengthen your argument if you show that you have considered them.

3. Recommended action. Offer a recommended solution. A recommendation of some kind must be made.

The purpose of the executive summary is to provide a briefing for a busy upper-level decision-maker. It must stand alone, so that it could be used independently of the staff analysis that follows in the analysis package. It must give a clear picture of the problem with a recommendation.

Next in the package will be a five to six page, double spaced analysis which builds on the executive summary with a more thorough discussion. Tables, graphs, and other exhibits should be labeled with letters (Exhibit A, Exhibit B, etc.) to distinguish them from the in-case exhibits. The exhibits will not count as part of the five to six page written requirement for the analysis. You should refer to each of your exhibits in the body of your analysis. You need not refer to them in order. It is impossible to do most of the cases without spreadsheet work; spreadsheets and graphs will be the exhibits. If you have several variations of the same spreadsheet, use a summary page to point out the differences in the scenarios. Also, usually having an assumptions page as one of your exhibits is helpful.

The analysis is the most critical part of your presentation. This portion of the analysis is aimed at the decision-maker's aides. It should explain the logic of your recommendations, and fill in the background on the points made in the executive summary. When you apply the principles of finance, they must be explained in plain English and the whole document must make sense on its own. In other words, you must convince the decision-maker and aides that you have found a problem that requires their attention, and that your recommendation is the best alternative for solving it.

I expect a bibliography as the last page of your written paper (or at the very least a list of sources, including internet sources.)

Presenters should assume that their audience has read the case carefully and is very familiar with the case facts. They will already be familiar with the basic facts about the company. Therefore, you should carefully avoid summarizing the case. Instead, give them new insights into the situation without simply repeating what they already know. Non-presenting class members are expected to ask questions as part of their class participation.

You will be graded on your accuracy in identifying the true problem areas in the situation, the effectiveness of your recommendations, the soundness of your logic, and the quality of your expression. Your analysis must reflect not only a sound grasp of finance theory, but also a well-conceived application.

You should not confine yourself to the case material when you prepare the analysis. The problems addressed in the cases are difficult ones that have typically been discussed in the academic and practitioner literature. The depth and quality of the analysis and the professionalism demonstrated by the presentation will be used to determine the grade for the group. I am looking less at what your solution is, and more at how well you support that solution.

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