Linear Technology

In: Business and Management

Submitted By nitrer12
Words 796
Pages 4
1. As an investor yourself, would you rather a firm pays you a lot of dividends or would you rather simply earn capital gains? In other words, would you rather your return for investing in a firm’s stock come from quarterly cash dividends or stock price appreciation? Why?
At this point in my life I would rather earn capital gains because I have a long-term investment horizon, and any gains I earn would only be taxed once the gains are realized. However, as I near retirement my preference would likely change in favor of dividend paying stocks in order to earn a steady income.

2. Given historically dividends result in higher taxes for individual investors than capital gains why have firms still paid dividends?
There are several reasons for this. Dividends are a way to attract risk-averse income seeking investors. Some large institutional investors such as mutual funds often will only invest in firms that pay dividends. Moreover, more mature companies will pay dividends from extra cash if the return they would be able to generate on new investment projects is less than the return shareholders are able to obtain by investing their money elsewhere. And finally, due to the signaling to investors who like dividends, it is difficult for companies to cut dividends without adversely affecting the firm’s stock price because cutting or not paying dividends would be interpreted as a negative signal about the firm’s future prospects.

3. LT is considering increasing dividends in the 4th quarter of 2003. Is Linear Technology in a financial position to consider a dividend increase (particularly in light of the sharp decline in sales and profits in fiscal year 2002)?
The past historical trend of LT’s dividend increases shows an increase of $0.01 each year. If LT would increase its dividend by another $0.01 it would result in a $0.06 dividend quarterly, or…...

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