CASE: Electronic Timing, Inc.

Electronic Timing, Inc. (ETI), is a small company founded 15 years ago by electronics engineers
Tom Miller and Jessica Kerr. ETI manufactures integrated circuits to capitalize on the complex
mixed-signal design technology and has recently entered the market for frequency timing
generators, or silicon timing devices, which provide the timing signals or “clocks” necessary to
synchronize electronic systems. Its clock products originally were used in PC video graphics
applications, but the market subsequently expanded to include motherboards, PC peripheral
devices, and other digital consumer electronic, such as digital television boxes and game
consoles. ETI also designs and markets custom application-specific integrated circuits (ASICs)
for industrial customers. The ASIC’s design combines analog and digital, or mixed-signal,
technology. In addition to Tom and Jessica, Nolan Pittman, who provided capital for the
company, is the third primary owner. Each owns 25 percent of the 1 million shares outstanding.
Several other individuals, including current employees, own the remaining company shares.

Recently, the company designed a new computer motherboard. The company’s design is
both more efficient and less expensive to manufacture, and ETI design is expected to become
standard in many personal computers. After investigating the possibility of manufacturing the
motherboard, ETI determined that the cost involved in building a new plant would be
prohibitive. The owners also decided to an outside that they were unwilling to bring in another
large outside owner. Instead, ETI sold the design to an outside firm. The sale of the motherboard
design was completed for an after-tax payment of $30million.

Timing Electronic, Inc (ETI), adalah sebuah syarikat kecil ditubuhkan 15 tahun yang lalu oleh
jurutera elektronik Tom Miller dan Jessica Kerr. ETI menghasilkan litar bersepadu untuk
memanfaatkan teknologi desain campuran isyarat kompleks dan baru-baru ini memasuki pasar
untuk generator timing frekuensi, atau peranti silikon masa, yang memberikan isyarat masa atau
"jam" yang diperlukan untuk menyegerakan sistem elektronik. Ia awalnya adlh produk jam
digunakan dalam aplikasi video PC grafik, tetapi pasaran kemudian diperluas untuk merangkumi
motherboard, peranti PC periferal, dan pelanggan elektronik digital yang lain, seperti tempat
televisyen digital dan game konsol. ETI juga mereka dan memasarkan litar bersepadu aplikasi-
khusus (ASICS) bagi pelanggan-pelanggan industri. Design ASIC menggabungkan teknologi
analog dan digital, atau dicampur-isyarat,. Selain Tom dan Jessica, Nolan Pittman, yang
menyediakan modal bagi syarikat, adalah pemilik primary ketiga. Masing-masing mempunyai 25
peratus daripada 1 juta saham yang beredar. Beberapa orang yang lain, termasuk pekerja,
memiliki saham syarikat yang tersisa.
Baru-baru ini, syarikat merancang sebuah motherboard komputer baru. desain syarikat adalah
baik lebih cekap dan lebih murah untuk menghasilkan, dan desain ETI diharapkan untuk menjadi
standard dalam banyak komputer peribadi. Setelah menyiasat kemungkinan manufaktur
motherboard, ETI ditentukan bahawa kos yang terlibat dalam pembangunan kilang baru akan
menjadi penghalang. Pemilik juga memutuskan ke luar bahawa mereka unwilling membawa
pemilik lain di luar besar. Sebaliknya, ETI tlh m’jual desain untuk sebuah syarikat luar.
Penjualan desain motherboard telah selesai bayaran selepas cukai sebanyak $ 30million.

5. 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 “retention” or “plowback” ratio. So,
the dividend next year will be the earnings next year, E1, times 1 minus the retention ratio. The most
commonly used equation to calculate the 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 today: What are the implications of this result in terms
of whether the company should pay a dividend or upgrade and expand its manufacturing capability?
Explain.

P0 =     E1 (1-b)
          Rs - ROE x b

Salah satu cara untuk nilai saham adalah pertumbuhan dividen, atau tumbuh-lamanya, model.
Pertimbangkan yang berikut: Nisbah pembayaran dividen adalah 1 - b, di mana b adalah "simpanan "
atau "plowback" nisbah. Jadi, dividen tahun berikutnya akan menjadi pendapatan tahun depan, E1, kali
1 tolak nisbah simpanan. Persamaan yang paling umum digunakan untuk mengira laju pertumbuhan
berterusan adalah tingkat pengembalian ekuiti kali nisbah retensi. Mengganti hubungan ini ke dalam
model pertumbuhan dividen, kita mendapatkan persamaan berikut untuk menghitung harga saham hari
ini: Apa implikasi dari kputusa ini dalam hal apakah syarikat perlu membayar dividen atau upgrade dan
memperluaskan keupayaan perkilangan? Jelaskan.

6. Does the question of whether the company should pay a dividend depend on whether the company is
organized as a corporation or an LLC?

1. Tom believes the company should use the extra cash to pay a special one-time dividend. How
will this proposal affect the stock price? How will it affect the value of the company?
2. Jessica believes that the company should use the extra cash to pay debt and upgrade and
expand it existing manufacturing capability. How would Jessica’s proposals affect the company?
3. Nolan is in favor of a share repurchase. He argues will increase the 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?
5. 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 “retention” or
“plowback” ratio. So, the dividend next year will be the earnings next year, E1, times 1 minus
the retention ratio. The most commonly used equation to calculate the 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
today: What are the implications of this result in terms of whether the company should pay a
dividend or upgrade and expand its manufacturing capability? Explain.
6. Does the question of whether the company should pay a dividend depend on whether the
company is organized as a corporation or an LLC?
In the days of falling stock prices, Board of Directors will often begin to pay dividends to help stabilize
the company’s stock. Many investors consider these dividends as a sign of safety and financial
conservatism (which they are in many cases). Dividends in and of themselves, however, do not
necessarily make the company a better investment. Companies that earn high returns on equity, have
little or no debt, and large room to expand in their current industry would best serve their shareholders
by paying no dividends. Instead, they should opt to reinvest all of the company’s available resources into
growing the value of the underlying business. The shareholders will be rewarded through appreciation in
the stock price.

In other words, a company should only pay dividends if it is unable to reinvest its cash at a
higher rate than the shareholders (owners) of the business would be able to if the money was in
their hands. If company ABC is earning 25% on equity with no debt, management should retain
all of the earnings because the average investor probably won't find another company or
investment that is yielding that kind of return.

Taxes and Dividend Policy

The tax consequences are tremendously important. If the company is earning 8%, and the
individual investor can only hope to earn around 8%, the business should still keep the proceeds
because of tax law. Why?

Say, for instance, a small company consistently earning 8% on equity made a profit of $100,000
last year. If the business reinvests that money back into itself, the shareholders could reasonably
expect the company to earn $8,000 on the reinvested earnings. If the $100,000 had been paid out
in the form of dividends, it would have been subject to the investor’s individual tax rates. For
simplicity’s sake, let’s say all of the shareholders are in the 30% tax bracket. When the $100,000
was paid out as dividends, $30,000 would have gone to the IRS, leaving only $70,000 available
to the investor to reinvest at 8%. At the end of the year, the investors could only expect a return
of $5,600 ($70,000 reinvested at 8% = $5,600). Over time, the discrepancy can add up to very
significant numbers.

Businesses that operate in mediocre industries (such as steel, railroads, etc.) with low returns on
equity would best serve shareholders by paying out profits as dividends. Take ALCOA (the
Aluminum Company of America) as an example. According to Yahoo! Finance, the company
has a return on equity of 4.89%. Investors can almost certainly earn a higher return, even when
adjusting for the adverse tax effects. True to form, the company pays out a lot of its cash flow to
shareholders.