Cultural Values Electronic Timing, Inc. (Case) Electronic Timing, Inc., (ETI), i

Question

Cultural Values

Electronic Timing, Inc.

(Case)

Electronic Timing, Inc., (ETI), is a 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 sales of the motherboard design was completed for an aftertax payment of $ 30 million.

Questions:

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 off debt and upgrade and expand its existing manufacturing capacity. How would Jessica's proposals affect the company?

3.Noland is in favor of a share repurchase. He argues that a repurchase 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 options discussed by Tom, Jessica, and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?

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

Explanation / Answer

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

2)Jessica's proposal will support an expansionary policy for the company which can resultto a higher growth rate for ETI. As to the company's dividend policy, not issuing theextra cash as a dividend signals to the market that there are still better and more efficientuses of the cash than using it for dividends.

3)A share repurchase if done correctly should be equivalent to the issuance of a cashdividend with the same amount as regards to effects on shareholders' wealth. The way theshare repurchases should be done in a way that it does not diminish or create shareholderwealth. Hence, Nolan's argument that the company's return and assets and return onequity will increase is not correct. However, the P/E ratio might go upwards for a timeuntil the market corrects it

4)

A plan to issue a regular dividend to shareholders is a start in establishing a dividendpayout policy. A dividend policy signals to the market that the company is making acommitment to its shareholders and hence the company strategies will have to be alignedwith that commitment.Therefore I would evaluate the proposal as regards the company's ability to stick to it. Forexample, it adopts a stable dividend policy - will it be able to have cash to honor suchpolicy year on, year off? Another factor would be does a regular dividend matter to ETI'sshareholders? Or do they prefer a different method of transferring wealth to them asidefrom a cash dividend?

5)No, an LLC can distribute earnings to its owners; however that distribution is not called adividend, but rather distribution of cash or property to the partners. It is still a dividend ina different nam

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