Electronic Timing Case Pg 619-620 in Corporate Finance tenth edition

Electronic timing

shares outstanding

$1,000,000.00

100%

$1,000,000.00

100,000.00

$ 10.00

3 owners, each owns

25%

of the $1million shares outstanding =

75%

$750,000.00

$250,000.00

remaining shares

25%

aftertax payment of motherboard

$30,000,000.00

1. Tom believes the company should use the extra cash to pay a special onetime dividend. How will this proposal affect the stock price?

How will it affect the value of the company?

2. Jessica believes that the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Jessicas proposal affect the company?

3. Nolan is in favor of a share repurchase. He argues that a repurchase will increase the companys 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? 5.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 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 share of stock today. P0= E1(1-b) / Rs-ROE*b 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. 6. Does the question of whether the company should pay a dividend depend on whether the company is organized as a corporation or an LLC?

4. Another option discussed by Tom, Jessica, and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?