Electronic Calendrier (EC) is a small company founded 15 years ago by electronics engineers Georges Thibald and Louis-Lucien Klotz. EC manufactures integrated circuits to capitalize on 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 were originally 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 games consoles. EC also designs and markets custom application-specific integrated circuits (ASICs) for industrial customers. The ASICs design combines analogue and digital, or mixed-signal, technology. In addition to Georges and Louis-Lucien, Katherine Pancol, who provided capital for the company, is the third primary owner. Each owns 25 per cent 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 companys design is both more efficient and less expensive to manufacture, and the EC design is expected to become standard in many personal computers. After investigating the possibility of manufacturing the new motherboard, EC 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, EC sold the design to an outside firm. The sale of the motherboard design was completed for an after-tax payment of 30 million.

One way to value a share of equity 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 ploughback 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 equity today:

1. 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.

Po = E(1 - b)/R, - ROE.b