ELECTRONIC TIMING, INC. Electronic Timing. Inc. (ETD), is a small company founded 15 years ago bv el engineers Tom Miller and Jessica Kerr. ETI manufactures integrated circuits to cani n the complex mixed-signal design technology and has recently entered the maritaze frequency timing generators, or silicon timing devices, which provide the timing sienal clocks" necessary to synchronize electronic systems. Its clock products originally wico used in PC video graphics applications, but the market subsequently expanded to motherboards, PC peripheral devices, and other digital consumer electronics, such tal television boxes and game consoles. ETI also designs and markets custom app lication pecific integrated circuits (ASICs) for industrial customers. The ASIC's design combines analog and digital, or mixed-signal, technology. In addition to Tom and Jessica, N Pittman, who provided capital for the company, is the third primary owner. Each ow 25 percent of the SI million shares outstanding. Several other individuals, includin rent employees, own the remaining company shares ns cur Recently, the company designed a new computer motherboard. The company's new is design is both more efficient and less expensive to manufacture, and the ETI design pected to become standard in many personal computers. After investigating the sibility of manufacturing the new motherboa in building a new plant would be prohibitive. The owners also decided that t that the costs involved were unwilling to bring in another large outside owner. Instead, ETI sold the design to an out side firm. The sale of the motherboard design was completed for an aftertax payment of $30 million 1. Tom believes the company should use the extra cash to pay a special one-time divi- dend. How will this proposal affect the stock price? How will it affect the value of the 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 Jessica 's proposals affect 3. Nolan is in favor of a share repurchase. He argues that a repurchase will increase the the company? company's 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 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? 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 "reter tion" or "plowback" ratio. So, the dividend next year will be the earnings next year, E times I minus the retention ratio. The most commonly used equation to calculate th sustainable 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 toda E(-b) What are the implications of this result in terms of whether the company dividend or upgrade and expand its manufacturing capability? Expla 6. Does the question of whether the company should pay a dividend depend on the company is organized as a corporation or an LLC ELECTRONIC TIMING, INC. Electronic Timing. Inc. (ETD), is a small company founded 15 years ago bv el engineers Tom Miller and Jessica Kerr. ETI manufactures integrated circuits to cani n the complex mixed-signal design technology and has recently entered the maritaze frequency timing generators, or silicon timing devices, which provide the timing sienal clocks" necessary to synchronize electronic systems. Its clock products originally wico used in PC video graphics applications, but the market subsequently expanded to motherboards, PC peripheral devices, and other digital consumer electronics, such tal television boxes and game consoles. ETI also designs and markets custom app lication pecific integrated circuits (ASICs) for industrial customers. The ASIC's design combines analog and digital, or mixed-signal, technology. In addition to Tom and Jessica, N Pittman, who provided capital for the company, is the third primary owner. Each ow 25 percent of the SI million shares outstanding. Several other individuals, includin rent employees, own the remaining company shares ns cur Recently, the company designed a new computer motherboard. The company's new is design is both more efficient and less expensive to manufacture, and the ETI design pected to become standard in many personal computers. After investigating the sibility of manufacturing the new motherboa in building a new plant would be prohibitive. The owners also decided that t that the costs involved were unwilling to bring in another large outside owner. Instead, ETI sold the design to an out side firm. The sale of the motherboard design was completed for an aftertax payment of $30 million 1. Tom believes the company should use the extra cash to pay a special one-time divi- dend. How will this proposal affect the stock price? How will it affect the value of the 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 Jessica 's proposals affect 3. Nolan is in favor of a share repurchase. He argues that a repurchase will increase the the company? company's 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 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? 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 "reter tion" or "plowback" ratio. So, the dividend next year will be the earnings next year, E times I minus the retention ratio. The most commonly used equation to calculate th sustainable 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 toda E(-b) What are the implications of this result in terms of whether the company dividend or upgrade and expand its manufacturing capability? Expla 6. Does the question of whether the company should pay a dividend depend on the company is organized as a corporation or an LLC