1. Describe Linear Technology’s payout policy
Historical record of dividends and repurchases
Dividends
Total
Per share
Payout ratio
Dividend yield
Repurchases ($)
Analyze Linear’s financing needs. Should Linear return cash to its shareholders?
Profitability vis-à-vis investment needs
Reasons for/against returning cash to shareholders
Taxes
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2. If Linear were to pay out its entire cash balance as a special dividend, what would be the effect on the share price? On earnings? On number of shares outstanding? On earnings per share? What if Linear repurchased shares instead?
Assume a Modigliani and Miller world: no taxes, no agency costs, perfect information, no transactions costs
Assume the company will use $1.5 billion of cash. The cash earns 3% interest income if the company keeps it.
Hint: Earnings for 2003 are only for the first 3 quarters. You need the earnings for the full year (i.e. 4 quarters) 2003.

3. Why do firms pay dividends?
Refer to class notes
What should Paul Coghlan recommend to the board?