Thursday
October 2, 2014

Homework Help: Financial Management

Posted by Sandra on Monday, March 9, 2009 at 11:43pm.

A small company was founded by 2 electronic engineers, Tom and Jessica, 15 years ago. The company manufactures integrated circuits to capitalize on complex mixed-signal design technology and has recently entered the market for frequency timing generators, or silicon timing devices, which provide the timing signal or clocks necessary to synchronize electronic systems. Its clock products originally were used in PC video graphic 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. The company design 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 the two founders, Nolan Pittman, who provided capital for the company is the 3rd 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 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, the company determine 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, the company sold the design to an outside firm. The sale of the motherboard design was completed for an aftertax payment of $30 million.

Question - 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?

The third owner 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?

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