ADRIAN RADITYATAMA

(041914353016)
RICKI SETIAWAN SULISTYO
(041914353031)
TOPIC
Electronic Timing, Inc. (ETI), is a small 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
ASICs’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 sale of the motherboard design was
completed for an aftertax payment of $30 million.
Questions
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?

Answer
Electronic Timing, Inc. (ETI) needs to be careful on how it dispenses the extra cash as
a dividend. Issuing the extra cash as a dividend would mean that the shareholders
collectively will probably drop by the same amount because of the transfer of wealth
from the company to the shareholders individually. Hence, the economic value of the
company will also decrease
Questions
Jessica believes that the company should use the extra cash to pay debt and
upgrade and expand it existing manufacturing capability. How would Jessica's
proposals affect the company?

Answer
Jessica's proposal will support an expansionary policy for the company which can
result to a higher growth rate for ETI. As to the company's dividend policy, not issuing
the extra cash as a dividend signals to the market that there are still better and more
efficient uses of the cash than using it for dividends.
Questions
Nolan is in favor of a share repurchase. He argues 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?

Answer
A share repurchase if done correctly should be equivalent to the issuance of a cash
dividend with the same amount as regards to effects on shareholders' wealth. The
way the share repurchases should be done in a way that it does not diminish or
create shareholder wealth. Hence, Nolan's argument that the company's return and
assets and return on equity will increase is not correct. However, the P/E ratio might
go upwards for a time until the market corrects it.
Questions
Another option discussed by Tom, Jessica and Nolan would be to begin a regular
dividend payment to shareholders. How would you evaluate this proposal?

Answer
A plan to issue a regular dividend to shareholders is a start in establishing a dividend
payout policy. A dividend policy signals to the market that the company is making a
commitment to its shareholders and hence the company strategies will have to be
aligned with that commitment.
Therefore I would evaluate the proposal as regards the company's ability to stick to it.
For example, it adopts a stable dividend policy - will it be able to have cash to honor
such policy year on, year off? Another factor would be does a regular dividend matter
to ETI's shareholders? Or do they prefer a different method of transferring wealth to
them aside from a cash dividend?
Questions
One way to value a share of stock is the dividend growth, or growing perpetuity,
model. Consider the following: The dividend payout ratio is 1 minus b, where b is the
"retention" or "plowback" ratio. So, the dividend next year will be the earnings next
year, E1, times 1 minus the retention ratio. The most commonly used equation to
calculate the sustainable growth rate is the return on equity times the retention ratio.
Substituting these relationships into the dividend growth model, we get the following
equation to calculate the price of a share of stock today: What are the implications of
this result in terms of whether the company should pay a dividend or upgrade and
expand its manufacturing capability? Explain.
Answer
The substituted dividend growth model is Dt=Dt-1(1+rb). This equation implies that
the future dividends of the company are directly related to the amount of earnings it
retains and the rate of return if makes from its investments. However, in order to
attain the company's targeted rate of return it also needs to retain more of its
earnings in the company for upgrading or expanding its manufacturing plant rather
than using it for cash dividends.

In the expansionary phase, the company has to make trade offs - lower dividends for
higher growth.
Questions
Does the question of whether the company should pay a dividend depend on
whether the company is organized as a corporation or an LLC?

Answer

No, an LLC can distribute earnings to its owners; however that distribution is
not called a dividend, but rather distribution of cash or property to the
partners. It is still a dividend in a different name.