Overview
As you prepare this case, please consider the questions below: (Note: this case doesn’t require much Excel work, so you only need to submit your writeup and don’t need to upload your spreadsheet)
1. Describe the dividend payout policy at Linear Technology (both in terms of what their dividends per share have been, and also what their payout ratio [defined as the percentage of net income paid out in dividends] has been). Which has been more stable over time, the dividends per share, or the payout ratio?
2. Describe the share repurchase policy at Linear. What are some reasons that Linear feels share repurchases are an important strategy?
3. What are Linear's CapEx financing needs (in relation to their net income numbers and cash balance)? Does the dividend potentially limit what they can spend on CapEx, based on the last few years? Since they have a lot of cash, do you think they should pay some of this out to the shareholders as a special dividend in your opinion?
4. Consider a hypothetical using the 2002 numbers in Exhibit 2: if Linear paid out their entire cash balance ($1.5 Billion) as a special dividend at the beginning of 2002, what would be the effect on the value of the firm? On the share price? On earnings and EPS? What if they used all of the cash balance to do a share repurchase at the beginning of 2002 instead? (You can assume that any share repurchase is done at $31.43 per share. Assume that Linear earns a 3.35% interest rate on their cash balance for your calculations.).
5. If you were Paul Coghlan, what is your recommendation to the board?