lectronic 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 ASICs design combines analog and digital, or mixed-signal, technology. In addition to Tom and Jessica, Nolan, 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.
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?
Jessica believes that the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability.
-How would Jessica’s proposals affect the company?
Nolan is in favor of a share repurchase. He argues that a repurchase will increase the companys 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?
Another option discussed by Tom, Jessica, and Nolan would be to begin a regular dividend payment to shareholders.
-How would you evaluate this proposal?