Electronic 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 electronic, 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.

Question

Electronic 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 electronic, 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 design is both more efficient and less expensive to manufacture, and ETI design is expected to become standard in many personal computers. After investigating the possibility of manufacturing the motherboard, ETI determined that the cost involved in building a new plant would be prohibitive. The owners also decided to an outside 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 $30million.

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?

Answer 1

If Electronic Timing, Inc. (ETI) decides to use the extra cash to pay a special one-time dividend, it can have an impact on the stock price and the value of the company.

1. Stock Price: When a company pays a special dividend, it usually indicates that the company has generated excess cash and might not have immediate investment opportunities. As a result, shareholders can perceive this as a positive signal, leading to an increase in demand for the stock, potentially driving up the stock price.

2. Value of the Company: Paying a dividend does not change the underlying value of the company. The value of a company is primarily based on its cash flows, growth prospects, assets, and overall financial health. However, paying a special dividend reduces the available cash reserves of the company, which could potentially limit its ability to pursue future investments or growth opportunities.

It is important to note that the impact on stock price and company value can vary depending on market conditions, investor sentiment, and the specific circumstances of the company. It is recommended to conduct a thorough analysis and consider various factors before deciding to pay a special dividend.