MINI CASE Microchips Inc. lownusrochips Inc. (KMI is a small company founded 15 years ago by electronics engineers Justin asn ud Suonn and has recently entered the market for ec used in PC video graphics applications, but the market Maher. KMIi manufactures integrated circuits to capitalize on the complex the timing signals or "clocks" necessary to synchronize electronic systems. is pC peripheral devices, and other digital consumer electronics, such as digia l Justin Langer design frequency timing generators, or silicon timing devices, clock products subsequently expanded to include boxes (ASICs) for mixed-signal technology. In addition to consoles. KMI also designs and markets custom application specific integrated circuits d eustomers. The ASIC's design combines analog and digital or dusrand Suzanne, Andrew Keegan, who provided capital for the company, is the third primary owner of the one million shares outstanding. The company has several other individuals, the owns 25 percent employees, who own the remaining shares. the company designed a new computer motherboard. The company's design is both more efficient expensive to manufacture, and the KMI design is expected to become standard in many personal com and less s Arter investigating the possibility of manufacturing the new motherboard, KMI determined that the n building a new plant would be prohibitive. The owners also decided that they were mowether large outside owner. Instead, KMI sold the design to an outside firm. The sale of the costs ss completed for an after-tax payment of $30 million. design was QUESTIONS 1 Justin believes the company should use the extra cash to pay a special one-time proposal affect the stock price? How will it affect the value of the company? 2 Suza nne believes the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Suzanne's proposals affect the company? 3. Andrew favours a share repurchase. He argues that a repurchase will increase the company's P/E ratio on assets, and return on equity. Are his arguments correct? How will a share repurchase affect the option discussed by Justin, Suzanne, and Andrew would be to begin a regular dividend payment 5. One way to value a share of stock is the dividend growth, or growing perpetuity, model. Consider the . So, value of the company? 4. Another to shareholders. How would you evaluate this proposal? following. The dividend payout ratio is 1 minus b, where b is the "retention" or plowback" ratio the dividend next year will be the earnings next year, E, times 1 minus the retention ratio. The most commonly used equation to calculate the 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: E,(1 b) where R,- Expected rate of return What t are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain