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?
If the company decides to pay a special one-time dividend using the extra cash, it can potentially affect the stock price and the value of the company in the following ways:
1. Stock Price: When a company pays a special dividend, it typically indicates that the company has excess cash and considers it unnecessary for reinvestment in its operations. This can be seen as a positive signal to investors, as it demonstrates that the company is financially healthy and generating sufficient profits. As a result, the stock price may initially experience a positive reaction from investors, causing it to increase.
2. Value of the Company: Paying a special one-time dividend does not directly impact the value of the company. The value of a company is typically determined by various factors, including its assets, earnings potential, growth prospects, market conditions, and other financial metrics. While the stock price may experience short-term increases due to positive investor sentiment, it does not necessarily reflect any changes in the fundamental value of the company. Therefore, the overall value of the company may remain relatively unchanged.
It's important to note that the impact on stock price and company value can also be influenced by other factors, such as market conditions, investor sentiment, and future prospects of the company. Additionally, different investors may have varying opinions on the impact of a special dividend, so it's always advisable to analyze the specific circumstances and consult with financial experts to assess the potential effects accurately.
Isn't the one time payment to the company part of the companies' net worth? So what happens to net worth if that is paid out as a dividend?
What would be the value of the company (and stock price) if the company sold all its assets, and distributed them to shareholders?
The real issue here is not asked...What is the alternative use of the money, and the value to the company in that usage? Companies are in the business of growing new products, and making a return on investments.