THE UNIVERSITY OF NORTH CAROLINA AT GREENSBORO
Joseph M. Bryan School of Business and Economics
Department of Accounting and Finance
Spring 2008
I.
Meeting Time and Place
MBA 625.01, Corporate Strategy and the Finance Function
6:30 p.m. – 9:20 p.m. M, Bryan School (Room 111 Bryan Bldg.)
II.
Instructor
Daniel T. Winkler
Office: 473 Bryan Bldg.
Phone: 256-0122
E-mail: dt_winkler@uncg.edu
Blackboard: http://blackboard.uncg.edu (Used extensively in this course)
Office Hours: 5:30 pm – 6:15 pm M; 2:00 pm – 2:30 pm TR, by appointment
III.
Prerequisites
Prerequisites: MBA 605, 617; Co-requisite is MBA 620
IV.
Course Materials
Douglas R. Emery, John D. Finnerty, and John D. Stowe. Corporate Financial
Management, 3rd Ed., Prentice Hall Publishing (Pearson), 2007. ISBN: 9780132278720.
Harvard Business Review Cases purchased and downloaded online at:
http://harvardbusinessonline.hbsp.harvard.edu/b02/en/cases/cases_home.jhtml
HP (Hewlett Packard) 10 B II, 17BII financial calculator or the equivalent.
V.
Course Description and Purpose
The UNCG Graduate Bulletin describes MBA 625 as follows:
"Finance in the strategic management process; corporate strategies and shareholder value
creation, financing decisions, distribution policy, and long-term investment decisions.”
The learning outcomes from this course are as follows:
1.
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4.
Recognize the role played by the finance function in developing a global strategic
plan.
Evaluate the extent to which a firm’s investment, financing, and dividend decisions
contribution to creating value for its common shareholders. Assess the degree to
which these financial policies support the firm’s overall corporate strategy.
Identify the major stakeholders in the modern corporation. Explain how the
interests of the stockholders in a multinational firm may be in conflict with other
stakeholders.
Estimate the required rate of return for a firm, and where appropriate, its various
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VI.
divisions. Use this financial standard as a basis for making investment decisions
that create value for the shareholders.
Understand how dividends and share repurchases affect the firm’s financial
statements and operating structure.
Estimate the firm’s debt capacity and use it to choose a target capital structure that
is consistent with the firm’s overall corporate strategy.
Class Organization, Procedures and Expectations
A 20-30 minute quiz will be given at the beginning class sessions with the exception of the
first session. The quizzes will consist of conceptual questions and textbook problems
assigned from the previous class session. Your lowest quiz grade will be dropped. There
are no makeup quizzes.
The next 1 – 1½ hour of class will be devoted to lectures on selected topics. PowerPoint
slides have been placed on Blackboard for you to review and print, but due to time
constraints, I will need to focus on selected topics. You are expected to be ready to discuss
all assigned material, but in particular, it is important that you work the Participation
Challenge problems that are included in the PowerPoint slide lecture.
Following the lecture, I’ll take time to answer questions you may have about the assigned
end-of-chapter problems. Please see the tentative schedule for the assigned problems. It is
important that you work the end-of-chapter problems because they will be the basis for
math problems on the quizzes. Because of limited time, we will not have time to solve all
of these problems in class. However, the solutions to these problems are posted on
Blackboard, and if you have difficulty doing them after seeing the solution, please contact
me.
The last half of the class will be devoted to discussion of an assigned case. So please work
the assigned case and answer the study questions. Your class participation grade will be
based on your answering of questions in the class, including the Participation Challenge
problems and questions in general about the assigned case. In addition, students will be
asked to make presentations of their answers to specific case questions.
VII.
Case Questions Presentations
It is important that you are prepared to discuss the assigned cases, and be able to analyze
them. In an effort to facilitate your understanding of these cases, I have developed a series
of in-depth questions for each case as shown later in the syllabus. I encourage you to form a
group of perhaps four students to prepare your answers to these questions. Although each
group is free to determine how each group member will participate, I would suggest that
each member be assigned specific questions, and that the answers be shared among the
group members.
I will ask individual students to answer these questions in front of the class. For the sake of
fairness, I will use index cards which will be randomly drawn. Some questions may be
easier than others, but that is the nature of a random draw. And with adequate preparation
in advance, any questions should be easily answerable. While you may be “the point
person” for answering the particular question, the preparation by your group to answer each
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question is important to preparing for the presentation.
Because of time limitations and the number of questions to be answered, your presentation
must last only 1 – 1½ minutes. Therefore, please stay within this time frame. If you exceed
it, I’ll have to cut your presentation short, and it will affect your grade. Be sure that your
comments are to-the-point. Also, be ready to answer questions from me or your fellow
classmates.
Your grade will be based upon the content but also on the delivery of your answer. An A
grade presentation is one which is completely correct and explained well, with follow-up
questions also addressed effectively. A B grade presentation is one which falls short of a
completely correct answer, misses the main point, or one which is not explained clearly, or
has follow-up questions which are not addressed effectively. The extent of these
shortcomings will be evaluated by me to determine your presentation grade. If you are not
prepared for answering a question, you can say “pass” which will result in a C grade for the
presentation. An absence by a student is equivalent to a “pass” if the student’s name is
called randomly. Failure to be prepared for case questions presentations for more than one
class session case will result in an F grade for those successive presentations. Likewise,
multiple class absences will be treated in a similar way.
VIII.
Case Question Write-ups
There will be two case questions from the assigned cases which require case question writeups. You are required to answer each one in writing and submit it to me for grading. The
two questions are indicated in bold in the case questions section.
The recommended solution should be based on the available data in the case and address
the decision and/or policy issues facing the firm. The grade you receive on the case writeups will be based on your ability to provide a solution that you can defend well, one that is
also supported from the facts of the case, and one that has a solid financial foundation. In
addition, you will be graded on grammar, spelling, punctuation, format and general
appearance of your case write-up.
While you may work with other students to think about your answer to the question, you
must write your own answer and in your own words. Papers that use other’s work will be
considered to be plagiarized, and subject to penalties as an Academic Integrity Policy
violation.
The write-ups will be no longer than one page; please include your name and seat number
at the top of the page. Please use an 11 point font with a 1.5” margins (for my corrections
and comments).The write-ups are due at the beginning of class on the evening that we
discuss the case. No late case question write-ups will be accepted.
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IX.
Attendance and Participation
Participating in class will give you the opportunity to learn from the diverse experiences
and knowledge of your colleagues. The participation will be based on your general
involvement in the discussions of the assigned cases, but also on answering questions to
Participation Challenge problems in the PowerPoint slides.
Although I may sometimes call on volunteers in class to answer questions, I will also call
on those who have not volunteered. The reason is that calling on non-volunteers will help
to learn to think through one’s view, and articulate and defend the view. It will also
motivate preparation for the class. Sometimes the questions will have one correct answer,
and other times, there will not be one “right” answer. The explanation and thought process
are always important in the evaluation of participation. Grading will be based on my
discretion and observation of an individual’s performance. When I evaluate participation, it
will be based on the quality of participation rather than the quantity. That is, your addition
to everyone else’s understanding is the basis of the class participation grade rather than how
many minutes of “talk time” were generated. Students who do not contribute can expect
lower class participation grades. An “A” grade is one which has a completely correct
answer, and one which is very insightful. A”B” grade answer is one which lacks perhaps
either correctness or insight. A “C” answer has an incorrect answer (or no answer) without
any insight. It is my judgment to make the decision about the correctness and insight
offered. It is your responsibility to ask me about your participation grade if you are unsure
about how you are being evaluated.
Attendance is expected in this class, and therefore, I will keep an attendance record. The
first step towards having first-rate participation is to be present in class. While work or
illness may prevent you from missing a class, additional missed classes will have a
substantial effect on the participation grade. Typically, it would be one letter grade per
additional missed absence. Please keep in mind that you are responsible for any
announcements made during class even if you absent.
Although a student’s attitude is not explicitly in the participation grade, it may be
considered in the determination of the final grade. Discourteous and/or unprofessional
behavior to me and/or fellow students may adversely affect a student’s grade. The amount
of the grade reduction is at my discretion.
X.
Grades
Your final grade you receive in this class largely depends on your grades on quizzes, case
questions presentations, case question write-ups and participation and attendance. The
course requirements have the following grade weights:
Graded Assignment
Quizzes
Case Question Write-up (two)
Case Questions Presentations
Participation and Attendance
The final grading scale is as follows:
% of final grade
60
20
10
10
5
Letter
Grade
A
AB+
B
BC+
Numerical
Score
92-100
90-91.9
88-89.9
82-87.9
80-81.9
78-79.9
Letter
Grade
C
F
Numerical
Score
70-77.9
0 – 69.9
Once everything is taken into consideration, the numerical score is rounded no more than
one-half point to determine your letter grade. Once final grades are submitted, I will not
change grades based on subjective considerations or re-grade old exams or assignments.
XI.
Other
The Bryan School has adopted expectation guidelines for faculty and students which can be
found at http://www.uncg.edu/bae/faculty_student_guidelines.pdf. We will implement
these guidelines. In addition, adherence to the Academic Integrity Policy is expected and
required of all students for all exams and assignments. Failure to abide by this policy will
result in disciplinary action. Details of the Academic Integrity Policy are available at:
http://saf.dept.uncg.edu/studiscp/Manual.html.
In the event of inclement weather, the class will strictly follow the University schedule.
The University posts on its web page the status of class cancellation.
This is an important course, and may difficult for some students. If you are difficulty with
understanding the concepts or doing the problems, please see me as soon as possible. This
course builds on cumulative knowledge from other courses, and also, it builds cumulatively
within the course.
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TENTATIVE SCHEDULE
Session 1:
Topic: Overview of Corporate Financial Strategy, and Investment vs. Financing Decisions
Reading: Review1 Chapters 1, 2, 3
Topic: Capital Budgeting
Reading: Chapter 10 (Review Chapter 9)
Problems (Chapter 10) 2: A2, A10, A11, B2, B4, B7, B9, B10, B15, B20
Minicase: The Power to Cool Off in Florida (end of Chapter 10)
Session 2:
Quiz 1
Topic: Capital Budgeting in Practice
Reading: Chapters 11
Problems: A5, A7, A8, A9, B2, B4, B6, B8
Minicase: Building the Eurotunnel (end of Chapter 11)
Session 3:
Quiz 2
Topic: Cost of Capital
Reading: Chapter 8 (Review Chapter 7)
Problems (Chapter 8): A3, A4, A5, A9, B6, B8, B10, B13, C1
Case: Cost of Capital at Ameritrade (9-201-046)
Session 4:
Quiz 3
Topic: Why Capital Structure Matters
Reading: Chapter 16
Problems: A2, A4, A6, A8, B1, B3, B5, B7, B8, C2
Minicase: PepsiCo’s Capital Structure Choice
Session 5:
Quiz 4
Topic: Managing Capital Structure
Reading: Chapter 17
Problems: A2, A3, B1, B4, B6, B7, B13
Case: Debt Policy at UST Inc. (9-200-069)
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Class discussion will focus primarily on the reading chapter(s) directly on the topic for the evening. Review
chapters are recommended background reading already discussed in MBA 605.
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Solutions to problems have been posted on Blackboard. Contact me if you have any questions.
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Session 6:
Quiz 5
Topic: Dividend Decisions
Reading: Chapter 18
Problems: A1, A7, A9, A10, B3, B4, B5, B6, B8, B9
Case: Dividend Policy at Linear Technology (9-204-066)
Session 7:
Quiz 6
Case: Dividend Policy at Linear Technology . . . continued
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Case Study Questions
Cost of Capital at Ameritrade
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What is the competitive position strategy that Joe Ricketts wants to pursue and why?
What has been the stock return performance of Ameritrade over the past 20 years ending in 1996?
What are Ameritrade’s primary sources of income? What are its primary expenses?
Are Ameritrade’s revenues strongly tied to the stock market? Why?
Compare the revenue stream of full-service brokers with Ameritrade. How do they differ?
What is Ameritrade’s mission according Ricketts? How does he plan to accomplish this mission?
Do you think this is an obtainable mission? Why?
What are the ingredients needed to achieve Ricketts’ strategy? What is the expected cost for
achieving this strategy in terms of advertising and technology enhancements?
Who are Ameritrade’s primary competitors? How does Ricketts plan to keep the competitors from
following Ameritrade’s lead?
What does Rickets believe that his role is as CEO? How does this role link with returns on
investment and cost of capital? Do you agree?
What is Rickets’expectation for return on investment? What were other members of the
management team expecting?
How large are the expected advertising and technology costs for the proposed strategy relative to
the book equity of Ameritrade? How large are these costs relative to the market value of equity
between March and September 1997?
What factors should Ameritrade management consider when evaluating the proposed advertising
program and technology upgrades? Why?
What is the formula for finding the net present value of a project? What are the implications of
choosing too high or too low of a discount rate?
What are the component costs of the cost of capital?
What is the formula for the CAPM? How might the CAPM be used as a framework for determining
the discount rate?
What is the definition of the risk-free rate? What length of time would you recommend for the
estimation of the risk-free rate in this case?
Should the historical or current risk-free rate be used? Why?
What is the estimate of the risk-free rate that should be employed in calculating the cost of capital
for Ameritrade?
What is the market risk premium? What is its purpose?
Should the risk-fee rate concept be consistent with that used in the market premium? Why or why
not?
According to the CAPM, theoretically what assets should be included for the estimation of the
model?
How is the risk premium proxied in reality?
When using historical data for the market premium, should be use a long or short time series?
Should we use large or small company stocks to estimate the market premium?
What do you believe is the most sensible approach to estimating the market premium? Why? What
is the estimate of the market risk premium that should be employed in calculating the cost of capital
for Ameritrade?
What is the definition of the CAPM asset beta? How is the asset beta related to the equity beta and
the debt beta?
Is it true that firms that generate cash flow streams with the same risk have the same asset beta?
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Why or why not?
28. In principle, what are the steps for computing the asset beta in the CAPM for purposed of
calculating the cost of capital for a project?
29. What comparable firms do you recommend as the appropriate benchmarks for evaluating the risk of
Ameritrade’s planed advertising and technology investments?
30. How would you estimate the equity beta for comparable firms? What would you do about the debt
betas?
31. How do you estimate the market value of a firm? Why do you need to know this for the asset beta?
32. Which firms would you identify as being comparable firms to Ameritrade that are publicly traded?
Why? (Exhibit 4)
33. To estimate the asset beta for Ameritrade, what time period would you recommend for the
estimation of equity betas? Why?
34. Calculate the stock returns using the stock price data in Exhibit 5. Use firms with data that extend
from 1992 – 96. Be sure to adjust for splits. (If no stock split: Rt = (Pt – Pt-1)/Pt-1. If x for y stock
split: Rt = ((x/y)Pt – Pt-1+ (x/y)Dt)/Pt-1, where Pt is the stock price in period t, Pt-1 is the stock price in
period t-1 and Rt is the return in period t). What is the mean and standard deviation of your stock
return calculations?
35. Calculate the equity betas for the investment services and discount brokerage firms in Exhibit 4
using the value weighted (VW) and equally-weighted (EW) market indexes in Exhibit 6. Use the
1992-96 time frame.
36. What do you think should be assumed about the debt beta? Why?
37. Using the stock price and returns data in Exhibits 4 and 5, and the capital structure information in
Exhibit 3, calculate the asset betas for comparable firms. Assume a tax rate of zero and use a valueweighted market index.
38. Using the stock price and returns data in Exhibits 4 and 5, and the capital structure information in
Exhibit 3, calculate the asset betas for comparable firms. Assume a tax rate 40% and use a valueweighted market index.
39. Using the stock price and returns data in Exhibits 4 and 5, and the capital structure information in
Exhibit 3, calculate the asset betas for comparable firms. Assume a tax rate of zero and use an
equally-weighted market index.
40. Using the stock price and returns data in Exhibits 4 and 5, and the capital structure information in
Exhibit 3, calculate the asset betas for comparable firms. Assume a tax rate 40% and use an equallyweighted market index.
41. Should market values or book values be used for weighting the cost of debt and cost of equity
capital? Why? How would you determine the proportion of equity and debt in this case?
42. Using the asset betas with the CAPM, estimate the cost of capital for discount brokers and
investment service firms. How does this cost of capital differ from the typical firm?
43. Based on your calculations, what do you think should be the cost of capital for Ameritrade? If
Yahoo! decides to offer discount brokerage services, what cost of capital should they use?
44. Does company –specific (unique) risk matter in this analysis? Should it? Why or why not? If not,
can you think of a situation when it would matter to Mr. Ricketts? (case question write-up)
45. How should Joe Ricketts, the CEO of Ameritrade, view the cost of capital estimate you have
calculated? What are its uses and limitations?
46. Compare your calculated cost of capital with that offered on the last page of the case. Does a
discount rate of 12% reported by a CS First Boston analyst seem reasonable? Why or why not?
47. Compare your calculated cost of capital with that offered on the last page of the case. Does a 15%
discount rate used by the CFO at Ameritrade seem reasonable? Why of why not?
48. Compare your calculated cost of capital with that offered on the last page of the case. Some
managers feel that the borrowing cost of 8-9% is the appropriate discount rate for future profit
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estimates? Do you agree? Why or why not?
Debt Policy at UST Inc.
1. What is the size of the smokeless and chewing tobacco markets? What have been the growth
characteristics of these markets?
2. What factors have lead to the growth of smokeless tobacco? Who are the primary consumers?
3. Describe UST’s historical market position in the moist smokeless tobacco market. Find evidence to
support your contention. What did they do to earn their market position?
4. What is happening to UST’s market position? Why?
5. How is UST responding to the change in market environment and their competition? Do you think
these changes will work? Why or why not?
6. What is the litigation and legislative environment regarding smokeless tobacco? How has UST
responded? Do you agree with their response? Why or why not?
7. What has been the growth in sales, earnings and cash flow of UST from 1988 to 1998?
8. How profitable has UST been from 1988 to 1998? Look at ROE, ROA and profit margin.
9. What trends do you see from the financial information in Exhibit 3 besides profitability? How is it
relevant to the analysis?
10. What is the profitability and size of other product segments of UST?
11. What is the extent of UST’s international operations, and how have they done? What other
operations has UST engaged in? Do you agree with their strategy? Why or why not?
12. How does UST’s financial performance compare with other tobacco firms in terms of ROE, ROA
and profit margin?
13. What other financial strengths/weaknesses do you see of UST compared to the competition?
14. What are the primary business risks associated with UST Inc.? What are the risk attributes of UST
Inc.?
15. What is UST’s debt rating? Explain the meaning of their credit rating. What is their commercial
paper rating?
16. Does UST’s debt rating seem reasonable compared with competitors? Why or why not?
17. If UST decides to increase its debt level, how is it likely to do so? Short term, long-term, etc.
18. How will S&P and other rating agencies determine the debt rating?
19. Why does the debt rating matter to UST?
20. What are the major threats facing UST?
21. How have financial analysts viewed UST’s future? Do you agree?
22. Do UST’s strengths and weaknesses allow them to deal with these threats? If so, how?
23. What opportunities are facing UST? Do UST’s strengths and weaknesses allow them to take
advantage of these opportunities? If so, how?
24. Where does UST currently stand with regard to the company’s stock repurchase program? Why are
they at this point?
25. Evaluate from the point of view of a bondholder. What is UST’s brand name and market position?
26. Evaluate from the point of view of a bondholder. What is UST’s cash flow generation?
27. Evaluate from the point of view of a bondholder. What is UST’s cyclicality?
28. Evaluate from the point of view of a bondholder. What is UST’s product diversification?
29. Evaluate from the point of view of a bondholder. What is UST’s brand geographic diversification?
30. Evaluate from the point of view of a bondholder. What is UST’s asset tangibility?
31. Evaluate from the point of view of a bondholder. What is UST’s litigation prospect?
32. Compare UST’s 5-year and 10-year growth in net sales, EBIT and EPS in Exhibit 3. What is the
median? What do you see?
33. Compare UST’s 5-year and 10-year average gross profit margin, net profit margin, ROE and
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dividend payout in Exhibit 3. What is the median? What do you see?
34. Compare UST’s gross profit margin, net margin, ROE, and ROA with the other six firms listed in
Exhibits 5 and 6. What is the median? What do you see?
35. Compare UST’s total debt/capitalization, debt/market capitalization, EBITDA/interest coverage and
corporate credit ratings in Exhibits 5 and 6. What do you see?
36. Assume that UST’s net sales, EBITDA and EBIT grow at 5% in 1999, and that the tax rate is 38%.
Assume the status quo and no recapitalization. Interest expense is also assumed to be currently
about $0. What are the pre-tax earnings, taxes, and net income?
37. Assume that UST’s net sales, EBITDA and EBIT grow at 5% in 1999, and that the tax rate is 38%.
Also assume a $1 billion recapitalization, and that interest is charged at the 20-year A bond rating
rate shown in Exhibit 8. Interest expense is also assumed to be currently about $0. What are the pretax earnings, taxes, net income, EBIT interest coverage and the EBITDA interest coverage?
38. Assume that UST’s net sales, EBITDA and EBIT grow at 5% in 1999, and that the tax rate is 38%.
Also assume a $1 billion recapitalization, and that interest is charged at the 20-year BBB bond
rating rate shown in Exhibit 8. Interest expense is also assumed to be currently about $0. What are
the pre-tax earnings, taxes, net income, EBIT interest coverage and the EBITDA interest coverage?
39. Assume that UST’s net sales, EBITDA and EBIT grow at 5% in 1999, and that the tax rate is 38%.
Also assume a $1 billion recapitalization, and that interest is charged at the 20-year BB bond rating
rate shown in Exhibit 8. Interest expense is also assumed to be currently about $0. What are the pretax earnings, taxes, net income, EBIT interest coverage and the EBITDA interest coverage?
40. According to the Modigliani and Miller, what is the value to shareholders of the $1 billion tax
shield assuming a stock repurchase and a tax rate of 38%?
41. If the value of UST’s equity increases from its current level shown in Exhibit 3 by the amount of
this interest tax shield just calculated, what should be the value of the stock after the $1 billion stock
repurchase?
42. Given the $1 billion stock repurchase, how many shares can be repurchased with the $1 billion, and
how many shares remain after the repurchase?
43. What is the market equity value after a $1 billion repurchase? What is the debt/( market equity)
ratio after repurchase?
44. Are the tax benefits reasonable in your view? Should a 38% tax rate be used?
45. Should bankruptcy costs be considered? How? Are there monitoring benefits of debt? What are
they?
46. Calculate the expected earnings per share and dividends per share. Assume as earlier no
recapitalization and a 5% growth in sales and EBIT, and a 38% tax rate. Assume the 64% dividend
payout ratio given in Exhibit 3.
47. Calculate the expected earnings per share and dividends per share. Assume as earlier the $1 billion
recapitalization at the 20-year average BBB interest rate shown in Exhibit 8, a 5% growth in sales
and EBIT, and a 38% tax rate. Assume the 64% dividend payout ratio given in Exhibit 3.
48. Should UST inc. undertake the $1 billion recapitalization? Taking your complete analysis into
consideration, what is your recommendation and why?
Dividend Policy at Linear Technology
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What was Linear Technology’s dividend payout based on FY 1994 earnings? Is this dividend
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payout low or high? Why were they set at that level according to Couglan?
What was Linear Technology’s dividend payout ratio in 2003? Why was it kept at that level
according to Couglan? Do you agree with him?
Why does Linear Technology buy back its stock according to Couglan?
Why has Linear Technology accumulated large cash balances over the years? How has the cash
balance been managed? Has this been wise from a financial perspective? What other options
were available?
What are viable choices for the large cash balance? What did Blaine Robbins of Janus Capital
think of Linear’s dividend? Do you agree?
What has been the dividend policy of the S&P 500 firms according to Exhibit 5? Why do you
think this has happened?
What is the payment of a dividend or repurchase of stock related to profitability and investment
opportunities? Is there signaling and perceptions by investors? What are these?
What is “dilution” and how is it related to stock options? What affect does the payment of
dividends have on the price of stock options?
What radical change to the taxation of dividends was proposed in the spring of 2003 by (a)
president Bush and (b) The House of Representatives? If the proposal was passed by Congress,
what would be the effect on the payment of dividends vs. capital gains? How might this affect
Linear’s dividend decision?
What is the market valuation of dividend payers vs. non-payers over time? What was the
sentiment in 2000? Was it shifting? If so, why?
Does the payment of more dividends alter the firm’s required rate of return? Does it alter its
value? Explain.
How many of the 16 firms on the SOX index paid a dividend? Which ones did Couglan focus
on? Why? Describe the dividend situation of the SOX index firms paying dividends. How does
this compare with Linear?
Calculate the payout ratio, dividend yield, dividends per share (split adjusted), repurchases per
share (split adjusted), net income as a % of sales, and cash flow as a percent of sales. What
trends do you see?
Describe how most companies increase or decrease their dividends. Is it based on maintaining
the same payout ratio every year? Is it based on a long-run payout ratio? Other method?
Does the current payout ratio represent a problem for Linear? What are capitalization
expenditures as a percentage of sales and pre-investment cash flow as a percentage of capital
expenditures?
Does Linear have a lot of operating leverage? Explain.
What is Linear Technology’s cash balance? How does it compare with its competitors? With a
corporate tax rate of 35% and a 3% interest rate, how long could Linear fund a $0.06 dividend?
Based on your analysis, can Linear increase its dividend and perhaps payout substantially
without incurring much risk of financial distress?
Suppose Linear holds excess cash balances in Treasury bonds. What are the tax implications of
returning cash to shareholders immediately? What is the after-tax value?
Suppose again that Linear holds excess cash balances in Treasury bonds. What are the tax
implications of returning cash in the next period (i.e. what is the after-tax value of the
distribution of reinvesting the month for one period and then distributing it)?
How does the personal versus corporate tax rate affect the decision to pay a dividend?
How have mini bond rates compared to corporate tax rates (Exhibit 8). What marginal tax rate
is implied? What does this tell you?
If the principal amount is not taxed (only interest), how does it change the taxation of a dollar of
distribution?
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What is the Modigliani and Miller (MM) Irrelevance argument? What is the predicted affect on
stock price if dividends are paid?
Assume MM in the presence of taxes, looking at Exhibit 7 in the spring of 2003. Would you
prefer a stock repurchase or payment of a dividend? What is your preference if tax rates are
equal? Why? (case question write-up)
What is the signaling principle as it relates to dividends? What is the cost of sending a signal? Is
Linear sending a signal about the future earnings prospects of the firm?
How is the payment of dividends viewed by the market, according to the information in Exhibit
3? What is the average earnings announcement reaction of a dividend increase relative to other
announcements? What is the reaction controlling for SOX?
Looking at Exhibit 6, what is Linear’s executive stock option situation? How would a $1.5
billion payout affect the stock price? How does Linear’s ESO situation compare with similar
firms?
What is the clientele effect? Does it pertain to Linear? What does Blaine Rollins suggest?
Has dividend policy changed for firms over the past forty years? Does it appear to be related to
taxes?
Is dividend policy related to investment opportunities? Explain.
Does capital market demand influence the payment of dividends? (See Exhibit 9)
If Linear were to pay out its entire cash balance as a special dividend, what would be the effect
on share price? Compare this strategy with just retaining the $1.5 billion.
If Linear were to pay out its entire cash balance as a special dividend, what would be the effect
on earnings and earnings per share? Compare this strategy with just retaining the $1.5 billion.
Instead of a special dividend, what if Linear repurchased shares instead? What would be the
effect on share price?
Instead of a special dividend, what if Linear repurchased shares instead? What would be the
effect on earnings and EPS. Assume a 3% interest rate.
What should Paul Coughlan recommend to the board? Why?