Integrated Waveguide Technologies, Inc. (IWT) is a 6 year old company founded by Hunt Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile internet and communication applications. IWTs technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques requires little capital as compared to many electronic fabrication ventures. Because of the low capital requirement, Jackson and Smithfield has been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile internet applications, IWT must now access outside equity capital to fund its growth, and Jackson and Smithfield have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy.

(1) What s meant by the term distribution policy? How has the mix of dividend payouts and stocks repurchase change over time?

Discuss (a) the information content, or signaling hypothesis.

Discuss (b) the clientele effect

Discuss (c) their effects on distribution policy.

(2) Assume that IWT has complete its IPO and has $112.5 million capital budget planned for the coming year. You have determined that its present capital structure (80% equity and 20% debt) is optimal and its net income is forecasted at $140 million.

(2.1)Use the residual distribution approach to determine IWTs total dollar distribution.

(2.2) Assume for now that the distribution is in the form of a dividend. Suppose IWT has 100 million shares of stock outstanding. What is the forecast dividend payout ratio?

(2.3)What is the forecast dividend per share?

(2.4) What would happen to the payout ratio and DPS if net income were forecast to decrease to $90 million? To increase to $160 million?

(3) Discuss the advantage and disadvantages of a firm repurchasing its own shares.