Financial Management Assignment

Linear Technologies Case Solution

1) Describe Linear Technologies pay-out policy.
As we can see from Exhibit 1 Linear Technology has been paying dividend steadily since 1992. Thus the pay-out policy is a large part in dividends. Its first dividend is paid in 1992.
The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.
Also analysing the numbers we see that Linear started its dividends with a low payout ratio of around 14.6%. It is known from general trends that investors out faith in early dividend paying firms but punish them if the company reduces its dividend over time. The management of Linear Technologies knows this fact and have increased the dividend over the years. Linear started with a modest pay-out of $0.00625 dividends/share but then increased its dividends steadily by $0.00125 every four quarters. After 2000 it increased this by $0.01 every year. In quarter 3 of 2003 Linear Technology paid a dividend of $0.05 with a pay-out ratio of 27.6%.
Even after the tech bubble burst in 2002 the firm has increased its dividend thus signalling to the investors its strength. At this point its pay-out ratio was in the range of 25% to 30%. This was much higher than those of other tech firms.

In the recent fiscal years Linear has been moving ahead with a policy of stock repurchase. This may be due to two plausible reasons. First since the majority of its employee payments is in stock options Linear is buying back its shares. This also helps it to counterbalance the