linear - Will Linear be able to fund the payout...

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Will Linear be able to fund the payout, alternatively what are its financing needs? Should Linear return cash to its shareholders? What are the tax consequences of keeping cash inside the firm? (20 points) In order to determine whether Linear will be able to fund the payout, add the total cash and short investments and then divide this amount by the shares outstanding to obtain the share price. (1,565.2/312.4) = 5.01 (share price) 5.01(27.4) =137.24 (earnings per share) Given Linear's positive cash flow and large cash balance, Linear will be able to fund the payout (Exhibit 2). The financing needs of Linear include issuing stock (equity) in order to cover paying out dividends to shareholders. Linear should return cash to its shareholders because it sends positive news about cash flows and earnings. In addition, Linear Technology will avoid agency problems by choosing to issue dividends. Once there is excess cash, managers then have a chance of taking advantage of their power and using these additional funds for their own personal use. Therefore, Linear should issue dividends to address possible agency problems.
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