Scribd Logo
Upload

Welcome to Scribd!

  • 435 views

    G6 Electronic Timing, Inc.

    Uploaded by

    Sylvia Mira
    Yes, the organizational structure of the company as a corporation or LLC does impact the decision about paying dividends. - For a corporation, paying dividends is one way to distribute profits to shareholders since corporate profits are taxed first at the corporate level before being distributed to shareholders. - For an LLC, profits "flow through" and are taxed at the individual member level rather than being taxed first at the LLC level. Since there is no double taxation, LLCs generally do not pay dividends. Instead, distributions to members are treated as draws against their individual capital accounts. So in summary, corporations are more likely to pay dividends to distribute after-tax profits, while LLCs do not typically pay dividends

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    G6 Electronic Timing, Inc.

    Uploaded by

    Sylvia Mira
    435 views18 pages
    Yes, the organizational structure of the company as a corporation or LLC does impact the decision about paying dividends. - For a corporation, paying dividends is one way to distribute profits to shareholders since corporate profits are taxed first at the corporate level before being distributed to shareholders. - For an LLC, profits "flow through" and are taxed at the individual member level rather than being taxed first at the LLC level. Since there is no double taxation, LLCs generally do not pay dividends. Instead, distributions to members are treated as draws against their individual capital accounts. So in summary, corporations are more likely to pay dividends to distribute after-tax profits, while LLCs do not typically pay dividends

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Yes, the organizational structure of the company as a corporation or LLC does impact the decision about paying dividends. - For a corporation, paying dividends is one way to distribute profits to shareholders since corporate profits are taxed first at the corporate level before being distributed to shareholders. - For an LLC, profits "flow through" and are taxed at the individual member level rather than being taxed first at the LLC level. Since there is no double taxation, LLCs generally do not pay dividends. Instead, distributions to members are treated as draws against their individual capital accounts. So in summary, corporations are more likely to pay dividends to distribute after-tax profits, while LLCs do not typically pay dividends

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    435 views18 pages

    G6 Electronic Timing, Inc.

    Uploaded by

    Sylvia Mira
    Yes, the organizational structure of the company as a corporation or LLC does impact the decision about paying dividends. - For a corporation, paying dividends is one way to distribute profits to shareholders since corporate profits are taxed first at the corporate level before being distributed to shareholders. - For an LLC, profits "flow through" and are taxed at the individual member level rather than being taxed first at the LLC level. Since there is no double taxation, LLCs generally do not pay dividends. Instead, distributions to members are treated as draws against their individual capital accounts. So in summary, corporations are more likely to pay dividends to distribute after-tax profits, while LLCs do not typically pay dividends

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 18

    Electronic Timing, Inc.

    Hernandez, Jholina Kris


    Perater, James
    Vallejera, Ramon Jr.
    THE CASE
    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 electronics, 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 new design is both
    more efficient and less expensive to manufacture,
    and the ETI design is expected to become standard
    in many personal computers. After investigating the
    possibility of manufacturing the new motherboard,
    ETI determined that the costs involved in building a
    new plant would be prohibitive. The owners also
    decided 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 $30 million.
    Question#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?

    Electronic Timing, Inc. (ETI) needs to be careful on how it dispenses the extra cash as a
    dividend. Issuing the extra cash as a dividend would mean that the shareholders collectively
    will probably drop by the same amount because of the transfer of wealth from the company
    to the shareholders individually. Hence, the economic value of the company will also
    decrease.

    The value of the company will decline by the amount of the dividend. Ignoring taxes,
    shareholders wealth will not be affected because the stock price will drop by the amount of
    the dividend payments.
    Illustration:

    1,000,000 shares @ Php 10/share = Php 10,000,000.00

    Dividends @ Php 2.00 = Php 2,000,000.00

    (php 10M – 2M = 8M)

    8M / 1M shares

    So, price per share is Php 8.00


    When a dividend is paid, the total value is deducted from a company's retained earnings.
    "Retained earnings" refers to the total amount of profit a company has accumulated over
    time that has not been put to other uses. Essentially, it is the amount of money a business has
    on account that it can use to pay dividends or fund growth projects.
    Question#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?

    Jessica’s proposal will support an expansionary policy for the company which can result to a
    higher growth rate for ETI. As to the company’s dividend policy, not issuing the extra cash
    as a dividend signals to the market that there are still better and more efficient uses of the
    cash than using it for dividends.

    If a company has an excess cash, it is good to roll it over and use for expansionary projects.
    In that way, assets (like cash) will be fully utilized.
    Question #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 argument correct? How will a share repurchase affect
    the value of the company?

    The P/E ratio will fall and the ROA and ROE will increase, but the changes are irrelevant
    because shareholder wealth will not be affected.
    What is Share Repurchase?

    A Share Repurchase is a program by which a company buys back its own shares from the
    marketplace, usually because management thinks the shares are undervalued, reducing the
    number of outstanding shares. The company buys shares directly from the market or offers its
    shareholders the option of tendering their shares directly to the company at a fixed price.

    Benefits of a Share Repurchase

    A share repurchase shows the corporation believes its shares are undervalued and is an
    efficient method of putting money back in shareholders’ pockets. The share repurchase
    reduces the number of existing shares, making each worth a greater percentage of the
    corporation. The stock’s earnings per share (EPS) increase while the price-earnings ratio (P/E)
    decreases or the stock price increases. A share repurchase shows investors the business has
    enough money set aside for emergencies and a low probability of economic troubles.
    What is Share Repurchase?

    Drawbacks of a Share Repurchase

    A share repurchase can give investors the impression that the corporation does not have other
    profitable opportunities for growth, which is an issue for growth investors looking for revenue
    and profit increases. A corporation is not obligated to repurchase shares due to changes in the
    marketplace or economy. Repurchasing shares puts a business in a precarious situation if the
    economy takes a downturn or the corporation faces financial issues it cannot cover.
    Question #3

    Assets 15,000,000
    Liabilities 5,000,000
    Equity 10,000,000
    Income 2,000,000
    Shares Outstanding 1,000,000

    2,000,000 10,000,000
    Return on Assets = Market Value per Share= = $10
    15,000,000 = 13.33% 1,000,000

    Return on Equity = 2,000,000


    = 20.00% 2,000,000
    10,000,000 Earnings per Share= = $2
    1,000,000
    10
    Price/Earnings Ratio = = 5:1
    2
    Question #3

    Assets 12,000,000
    Repurchase Shares of 300,000 shares at @$10
    Liabilities 5,000,000
    Equity 7,000,000
    Income 2,000,000 $3,000,000.00
    Shares Outstanding 700,000

    2,000,000 7,000,000
    Return on Assets = = 16.67% Market Value per Share= = $10
    12,000,000 700,000

    Return on Equity = 2,000,000


    = 28.57% 2,000,000
    7,000,000 Earnings per Share= = $2.85
    700,000
    10
    Price/Earnings Ratio = = 3.5:1
    2.85
    Question #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?

    A regular dividend payment is something the company should probably not undertake. A company rarely
    begins regular dividend payment that it will be unable to continue in the future. Cessation of dividend
    payments is viewed a negative signal by the market
    Question #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.

    b = retention ratio
    Question #5
    b = retention ratio

    Answer:

    This equation implies that future dividends is directly related to the amount of earnings it retains
    and the rate of return it makes from its investments. However, in order to attain the company's
    targeted rate of return it also needs to retain more of its earnings in the company for upgrading or
    expanding its manufacturing plant rather than using it for cash dividends.

    In the expansionary phase, the company has to make trade offs - lower dividends for higher growth.
    Question #5
    b = retention ratio

    Answer:

    This also implies that the company should not retain earnings unless the ROE of the new project is
    greater than the shareholders required return on equity.
    Question #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?

    A limited liability company (LLC) is a corporate structure whereby the members of the company cannot be
    held personally liable for the company's debts or liabilities. 

    While the limited liability feature is similar to that of a corporation, the availability of flow-
    through taxation to the members of an LLC is a feature of partnerships.

    The question of whether the company should pay a dividend does depend on whether the company is
    organized as a corporation or an LLC largely due from a taxation standpoint. Money paid to shareholders
    of a corporation are dividends, and currently taxed at the lower dividend tax rate. Money paid to the
    owners of a LLC is considered income, and taxed at the applicable personal income tax rate.
    The End! :)

    You might also like