Integrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt Jackson and David Smith field to exploit meta material plasmonic technology to develop and manufacture miniature microwave frequency direction al transmitters and receivers for use in mobile Internet and communications applications. IWTs technology, although highly advanced, is relatively in expensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, Jackson and Smith field have 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 Build a Model: Distributions as Dividends or Repurchases resource 604 Part 6 Cash Distributions and Capital Structure the, and Jackson and Smith field have decided to take the company public. Until now, Jackson and Smith field 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. Your new boss at the consulting firm Flick and Associates, which has been retained to help IWT prepare for its public offering, has asked you to make a presentation to Jackson and Smith field in which you review the theory of dividend policy and discuss the following issues. a.(1) What is meant by the termdistribution policy?How has the mix of dividend payouts and stock repurchases changed overtime?(2) The termsirrelevance,dividend preference(orbird-in-the-hand),andtax effecthavebeenusedtodescribethreemajortheoriesregardingthewaydividendpayoutsaffectafirmsvalue.Explaintheseterms,and briefly describe each theory.(3)What do the three theories indicate regarding the actions management should take with respect to dividend payouts?(4) What results have empirical studies of the dividend theories produced?How does all this affect what we can tell managers about dividend payouts? b. Discuss the effects on distribution policy consistent with:(1)the signaling hypothesis (also called the information content hypothesis) and (2)the clientele effect.c.(1)Assume that IWT has completed its IPO and has a $112.5 million capital budgetplannedforthecomingyear.Youhavedeterminedthatitspresentcapitalstructure(80%equity and 20% debt) is optimal, and its net income is forecasted at $140million. Use the residual distribution approach to determine IWTs total dollar distribution. 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 forecasted dividend payout ratio? What is the forecasted dividend per share?What would happen to the payout ratio and DPS if net income were forecasted to decrease to $90 million?To increase to $160 million?(2) In general terms, how would a change in investment opportunitiesaffectthepayoutratioundertheresidualdistributionpolicy?(3)What are the advantages and disadvantages of the residual policy? (Hint: Dont neglect signaling and clientele effects.) d.(1)Describe the procedures a company follows when it makes a distribution through dividend payments.(2) What is a stock repurchase?Describe the procedures a company follows when it makes a distribution through a stock repurchase. e.Discuss the advantages and disadvantages of a firm repurchasing its own shares. f. Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWTs value of operations is estimated to be about $1,937.5 million, and it has $387.5 million in debt (it has no preferred stock).As mentioned previously, IWT has 100 million shares of stock outstanding.(1)Assume that IWT has not yet made the distribution. What is IWTs intrinsic value of equity? What is its intrinsic stock price per share?(2)Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWTs intrinsic value of equity? What is its intrinsic stock price per share?(3)Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWTs intrinsic value of equity? How many shares did IWT repurchase?How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?