Intel Corp. in 1992 faced decisions around financing and dividend policy as the company matured. It had high levels of cash but also significant R&D and capital expenditure needs to adhere to Moore's Law of technological progress. The document discusses 3 options for cash disbursement: 1) dividends but these are tax-inefficient, 2) stock repurchases which are better for investors, with a Dutch auction proposed to set competitive prices, 3) unconventional options like put warrants or convertible debentures but these carry speculative effects. The optimal policy balances returning cash to shareholders while funding innovation as Intel moves into a mature growth phase.

1. Intel Corp. 1992 – Financing and Dividend Policy
Group T2
Anish Sengupta (13407)
Deepanwita Nandi (13417)
Navonil Rahut (13430)
Neha Poddar (13431)
Sourav Mohapatra (13453)

2. 1.Financial Policy Making
• Industry Trend ( Highly Innovative)
INDUSTRY PDLC (MIN.) = (2+1+2+2+2+2+2) yrs = 11 yrs
INDUSTRY PDLC (MAX.) = (6+1.5+4+4+3+2.5+5) yrs = 26 yrs

3. • Intel’s Innovation and Success
– ability to adapt to perpetual paradigm shifting and its solid
business relations with major buyers of integrated circuits.
– established reputation as a company that was consistently at the
forefront of innovation. In the integrated circuit industry, a
company’s innovation is fundamental to its success. “Moore’s
Law”—the industry-wide benchmark for innovation—was created
by Intel cofounder Gordon Moore. The law claims that the number
of components on a chip doubles every two years.
– adherence to Moore’s law costly.
– Projection for 1992, $700 million in research and development
costs and $1.2 billion in property plant and equipment costs.
– responsible for 16 of the 22 major breakthroughs in
microelectronics between 1971 and 1981.
1.Financial Policy Making (Contd.)

4. • strong customer ties with major buyers of integrated
circuits
– IBM accounted for 8.6 % revenues and Purchased 12.5 mn shares
• R&D investment
– made large investments in research and development and property,
plant, and equipment, which have thus contributed to their fixed
costs. These fixed costs lead to a higher operating leverage which can
make the good times better and the bad times worse
– i80286 and i80386DXTM
– Sales increasing from 822 million in 1989 to 1084 million in 1990 to
1361 million in 1991.
• Advertising Budget
– $100 mn on “intel inside”
– entering ramp up phase (profitable phase) and high customer demand.
1.Financial Policy Making (Contd.)

5. 1.Financial Policy Making (Contd.)
Increase in R&D and Advertising Budgets and Assets( Depreciation , Amortization)

6. 1.Financial Policy Making (Contd.)
Intel’s product list Product Portability

7. 2.Financial Policy@Maturity
Estimated Future Cash Flows When the Firm will Mature

8. • Optimal Target Capital Structure
– evaluate the levels of competitive threats, financial distress costs, indirect
costs, conflicts of interests, flexibility, management incentives, and market
signals.
– the need for low debt and high equity once maturity is obtained.
• Recommended Capital Structure
– altering capital structure to increase company ROE
– Take advantage of tax Benefits by raising level of Debt For tax shield
– Decrease equity Financing
– needs the flexibility of cash on hand to fund continued research and
development, purchase of property, plant, and equipment, and to act as a
reserve to buffer any losses, lawsuits, and other unforeseen expenses.
2.Financial Policy@Maturity

9. 2.Financial Policy@Maturity
Incremental Cash Flow (ex.12)
According to Exhibit 12 in the case, the
increase in cash for the years 1991
through 1995 would total an increase
of $2.749 billion. In 1990 the ending
balance of cash was $1.785 billion so
by 1995 the cash balance would be
$4.534. The pessimistic forecasts for
the same years predict a total increase
of $1.211 billion in cash, which would
make a 1995 year end cash position of
$2.996 billion. The average of these
two extremes project an ending cash
position of $3.765 billion—or $1,980
billion above the 1990 cash level (see
Exhibit 2).
Intel’s Cash Flow

10. • Necessary Steps to Be taken
– distributing more cash in part to maintain Intel's low Long-Term Debt-
to-Assets Ratio of 10.43 percent (as compared to the industry average
of 13.823 percent.) (Exhibit. 8)
– low ratio beneficial because of the inherent volatility in the integrated
circuit industry low debt ratio can allow for flexibility during
tumultuous economic times.
– In 1987, the LT-Debt-to-Assets Ratio was 12 to 13 percent but by 1990
this level had dropped to 6 percent. To increase profitability they need
to increase their financial leverage by increasing their level of debt.
– cash levels are much too high.
– cash levels of $2.4 billion in 1992, can finance its planned investment
expenditures out of cash for almost two and one-half years without
any cash flow from operations.
– Cash is excessive. Even if balance lowered of cash by 50 percent, cash
levels still 2 to 3 times the industry average.
2.Financial Policy@Maturity

11. 2.Financial Policy@Maturity
Years Of Cash (Exhibit 8)
The Following Graph shows the
number of years of current
expenditures that can be funded
by net cash balances .
The industry average is 0.70 hence
as the company matures it should
decrease years cash to increase its
financial leverage.
Intel also has very low levels of
financial leverage. If Intel wants to
decrease cash levels while
increasing, financial leverage, the
best option is to issue stock
repurchases. By decreasing its
cash levels Intel is able to raise its
LT Debt-to-Assets ratio.

12. 3. Cash Disbursement Policy
A. through the issuance of dividends
 Benefits
• investors would be ecstatic to receive this periodic return on investment
 Costs
• tax-inefficient way to distribute funds. subjected to the corporate tax
rate
• these dividends are also considered taxable income which is taxed at the
investors tax rate—not the capital gains tax rate.
• investors entrust managers to profitably invest their capital, returning
dividends to the investors may indicate an inability to perform this task.
• issuing dividends may be the beginning of a cycle that cannot easily be
stopped. Once Intel starts issuing dividends, it will be difficult to stop
without raising serious concerns about the profitability potential of a
company.

13. Past Outcomes
• In 1987, Intel repurchased and retired 13.35
million shares for $27 per share, which drastically
increased price per share from around $28 to over
$40 per share.
• Intel again made a repurchase in 1990 of 3.20
million shares; similar results followed and share
prices rose from around $30 per share to over $50
per share
3. Cash Disbursement Policy (Contd.)
B. stock repurchases
Benefits
from an investor’s perspective, stock repurchases are
taxed at a lower rate. In 1991 and 1992, the tax rate
on long-term capital gains tax for the highest tax
bracket was 28%. Compared to a 31% tax rate for
income (which dividends are taxed at) it is easy to see
why investors would be in favor of stock repurchases.

14. • Type Of Repurchase Decision
– Condition
• Price of Intel's shares increase a repurchase becomes more and more
expensive.
– Recommendation
• type of repurchase that maximizes the amount of shares that they can
acquire with as little cost as possible.
• Growth Firm hence as per Walter’s and Gordon's model Dividend not to be
paid
– Options
• Open-market repurchase will cause delays and allow other investors to
push up the price before Intel goes in and repurchases.
• announcing a flat fixed-price tender offer will have to be competitive to
attract the volume that they desire.
– Issues
• Best price = Lowest Price @ volume required hence will leave majority
stockholders disappointed with value of equity
• decision not necessarily be in the best interest of the majority of the
shareholders.
3. Cash Disbursement Policy (Contd.)

15. • Alternative Scheme
– Dutch Auction
• Intel can choose how many shares it wishes to buy back and specify a
maximum price at which they are willing to do so.
• Shareholders then place bids at which they are willing to have their shares
repurchased.
• Those who want to ensure that their shares are repurchased will bid at a
lower price.
– Advantages
• that Intel can purchase back their shares at a competitive price based on
the demand for their shares.
• very quick process and gives agency to Intel's shareholders to sell their
shares at the price of their choosing
– Estimated Buy Back
• Available Funds(cash) = $ 2.7 bn , Research requirements = $700 mn ,
New plant and equipment Requirements = $1.2 bn , Net available Funds =
$800 mn, Price of Share = $42.50, No. of share repurchase @ $42.50 =
18,823,529 shares
3. Cash Disbursement Policy (Contd.)

16. • Unconventional Package
– Put warrant
• Sell option of 10% holding after 2 yrs @$50 back to Intel
• Sell warrant @60¢ @ open market
– Effect ( Speculative)
• Rise in stock prices above $50 after 2 years hence none willing to sell Debt
gone/cancelled.
• Fall in Stock Prices below $50 after 2 years hence buy back exercised thus
Debt remains unchanged.
– Convertible Debenture
– Convert Option after yr 2 @ $75 /share for 10 yrs Conv. Sub. Debentures
with 5% coupon
– Effect ( Speculative)
• No change in Debt If share price not above $75 is difficult hence no one will opt for
the option hence debt will remain same
• Change in shareholders wealth if Share price above $75 hence converted to shares
thus increase in no. of shares by 13.3 mn hence decrease in share price
3. Cash Disbursement Policy (Contd.)