Electronic Calendrier SA
Electronic Calendrier (EC) is a
small company founded 15 years ago by electronics engineers Georges Thiébald
and Louis-Lucien Klotz. EC 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. EC also designs and markets custom application-specific
integrated circuits (ASICs) for industrial customers. The ASIC’s design
combines analogue and digital, or mixed-signal, technology. In addition to Georges
and LouisLucien, Katherine Pancol, who provided capital for the company, is the
third primary owner. Each owns 25 per cent 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 EC design is expected to become standard in many personal computers. After
investigating the possibility of manufacturing the new motherboard, EC
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, EC sold the design to an outside firm. The
sale of the motherboard design was completed for an after-tax payment of €30
million.
1 Georges believes the company
should use the extra cash to pay a special one-time dividend. How will this
proposal affect the share price? How will it affect the value of the company?
2 Louis-Lucien believes that the
company should use the extra cash to pay off debt and upgrade and expand its
existing manufacturing capability. How would Louis-Lucien’s proposals affect
the company?
3 Katherine is in favour of a share
repurchase. She argues that a repurchase will increase the company’s P/E ratio,
return on assets and return on equity. Are her arguments correct? How will a
share repurchase affect the value of the company?
4 Another option discussed by
Georges, Louis-Lucien and Katherine would be to begin a regular dividend
payment to shareholders. How would you evaluate this proposal?
5 One way to value a share of
equity is the dividend growth, or growing perpetuity, model. Consider the
following: The dividend payout ratio is 1 minus b, where b is the ‘retention’
or ‘ploughback’ ratio. So, the dividend next year will be the earnings next
year, E1 , times 1 minus the retention ratio. The most commonly used Equation
to calculate the sustainable growth rate is the return on equity times the
retention ratio. Substituting these relationships into the dividend growth
model, we get the following Equation to calculate the price of a share of
equity today:
What are the implications of this
result in terms of whether the company should pay a dividend or upgrade and
expand its manufacturing capability? Explain.
6 Does the question of whether the
company should pay a dividend depend on whether the company is organized as a
corporation or partnership?