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Q2. If Linear were to pay out its entire cash balance as a special
dividend, what would be the effect on the value, share price,
earnings, and earnings per share? How would these get
impacted if Linear repurchased shares instead?
Answer. Since there are 312.4 million outstanding common shares
and $1.565.20 million in cash and short-term investments, if the firm
decides to distribute the entire sum as a special dividend, each share
will receive $5.01. This will result in a $5.01 decline in share price. As
all of the money is distributed as dividends, this will lower the
company's interest income. As a result, it will lower the company's
earnings and earnings per share.
Linear has the option to repurchase 50.7 million shares of the firm if
it decides to do so. Thus, there will be 261.70 million common shares
in circulation.