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Infineon technologies

FM-II
GROUP-3, SECTION-F
Arjit Gupta 19/307
Rishi Gurudas K 19/313
Pranita Agarwal 19/324
Rupali Chugh 19/335
Shorya Chaplot 19/344

1. Describe Infineons financial policy and its capital structure in recent


years. What have been Infineons main sources and uses of funds?

Formation of
2000Company

Raised Capital
1.5 bn Equity
2 bn Debt
700 mn Divestments

2001

Raised Capital
1 bn 5yr convertible
2002
bond
700 mn 7yr convertible
bond

14% Qimondas stake sold


195.6 mn 5yr convertible bond
2006

243 mn Sold Wireline unit


725 mn Rights Issue

Raised

2009Capital

Divestment

2011
1.1 bn Sold
Wireless Unit

Capital Structure and Financial Policy


Debt-to-Equity
Ratio(D/E)

2008

2009

2010

2011

0.45

0.16

0.1

0.07

The company has reduced


debt over the years

Uses of Funds
To keep consistent investments in R&D department
To repay some of the debt
To maintain cash reserves to sustain the sectors cyclical and capital intensive nature and
the need to be on the lookout for acquisition opportunities

2. Estimate Infineons sustainable growth rate and explain its level.


What explains Infineons current capital structure?
Infineons sustainable growth rate is around 9.37%.
Infineons current capital structure
Total Debt = 237
Total Equity = 3355
Debt/Equity = 0.0070
The surplus cash reserve with Infineon that was used to repurchase convertible bonds worth 173
millions explains this new capital structure
Dividend worth 109 million was paid out
Warrants were issued which were another 26 million
All of this along with the risky nature of the industry with high fixed costs explains Infineons decision
to maintain a very low Debt/Equity ratio so as to not risk bankruptcy during a business downturn
period.
Infineon was dragged to bankruptcy due to the crisis with Qimonda

4. Why would a company pay out cash to shareholders? In your


view, what is the primary objective in paying out cash?

A company pays out cash to shareholders for the following reason:


Provide certainty about a companys financial well-being
Attracts new investors
Affect credit-rating- stable dividend pay-outs will be negatively impacted by lowering or omitting
dividend distributions and positively affected by increasing dividend pay-outs
Infineon's primary objective of paying out cash to shareholders was to reinvest their faith in the
company that they had a strong financial footing in addition to the fact that they will not fall prey to
an acquisition by another firm. The organization had now entered into a business model where they
could afford regular dividends and they wanted to be recognized as a firm whose dividend payments
could be relatively predictable. With the cash reserves forming 80% of the asset base, it would build
up pressure as this asset is not returning zero interest.

5. Given Infineons primary objective, what are the pros and cons
of these payout methods?
Pay-out Method

Pros

Regular cash
dividends

One time special


dividend

Open market
repurchases

If Infineon is to continually issue cash dividends, they will be


careful about their company finances. Infineon will be more
cautious while taking a debt
A company issuing dividends could have a signaling effect such
that a company issuing dividends is a well-established company

One time special dividend is usually well received by investors


thus attracting more investors

Reduces the number of shares outstanding. This increases the


value of earnings per share
There may be a block of shares from one or more large
shareholders that could come into the market. If many of these
shares come to the market, it may reduce the value of the share

Fixed-priced
self-tender offer

Infineon may repurchase the shares for a certain fixed amount.


This reduces uncertainties and ambiguities

Dutch-auction
self-tender offer

Infineon could buy back shares at the lowest bid

Cons

Cash paid out to investors could have been used by


Infineon in acquiring other financial assets

Special dividend will signal to investor that Infineon


dont know to effectively utilize surplus cash
Many investors jump on board for the payout,
bumping up the stock price. Thus, one time
dividends could get pricey

Infineon may end up paying too much for the stock


it repurchases

Infineon has to liquidate its stock position in case


tender offer fails

Infineon has to liquidate its stock position in case


tender offer fail

6. Consider Infineons less standard pay-out methods (put warrants


issues and convertible bond repurchase). How do these methods
work? Under what conditions these might be an appealing strategy?
Put Warrants
Warrants are options issued by a firm where the underlying asset is the firms equity. The holder of the warrant has a
right to purchase a fixed number of shares of the firm at a price called the strike price. A put warrant is an equity
derivative that gives the holder the right to sell the underlying equity back to the firm at the warrants strike price.

Convertible Bond Repurchase


These are bonds that give the bond holder the right to convert the bond to a fixed number of equity shares of the
issuing firm. These bonds are issued at a lower yield compared to non-convertible bonds. If the convertible bond has
an embedded call option then this gives the issuing firm the right to repurchase the bond at an agreed upon strike
price.
Put warrants are exercised by the holder when the price of the underlying equity falls below the strike price. Buying
back the equity at a premium over the market price is an indirect way of providing a dividend to the investor that is
tax exempt unlike normal dividends.
Repurchasing deep-in-the-money convertible bonds is beneficial to the holder of the bond. Since the price of the
underlying is lower than the value of the bond and the strike price, purchasing the bond from the holder is for of
dividend payment to the holder that is tax exempt as there is no capital gains. The holder gains by receiving a strike
price that is higher than the value of the equity.

Thank You!