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28 Sep 2019
In 2010, the Keenan Company paid dividends totaling $3.6 million onnet income of $10.8 million. The year was a normal one, andearnings have grown at a constant rate of 10% for the past 10years. However, in 2011, earnings are expected to jump to $14.4million, and the firm expects to have profitable investmentopportunities of $8.4 million. It is predicted that Keenan will notbe able to maintain the 2011 level of earnings growthâthe high 2011projected earnings level is due to an exceptionally profitable newproduct line to be introduced that yearâand then the company willreturn to its previous 10% growth rate. Keenanâs target debt ratiois 40%.
a. Calculate Keenanâs total dividends for 2011 if it follows eachof the following policies:
(1)Its 2011 dividend payment is set to force dividends to grow atthe long-run growth rate in earnings.
(2) It continues the 2010 dividend payout ratio.
(3)It uses a pure residual policy with all distributions in theform of dividends (40% of the $8.4 million investment is financedwith debt).
(4)It employs a regular-dividend-plus-extras policy, with theregular dividend being based on the long-run growth rate and theextra dividend being set according to the residual policy.
b. Which of the preceding policies would you recommend? Restrictyour choices to the ones listed, but justify your answer.
c. Does a 2011 dividend of $9 million seem reasonable in view ofyour answers to parts a and b? If not, should the dividend behigher or lower?
In 2010, the Keenan Company paid dividends totaling $3.6 million onnet income of $10.8 million. The year was a normal one, andearnings have grown at a constant rate of 10% for the past 10years. However, in 2011, earnings are expected to jump to $14.4million, and the firm expects to have profitable investmentopportunities of $8.4 million. It is predicted that Keenan will notbe able to maintain the 2011 level of earnings growthâthe high 2011projected earnings level is due to an exceptionally profitable newproduct line to be introduced that yearâand then the company willreturn to its previous 10% growth rate. Keenanâs target debt ratiois 40%.
a. Calculate Keenanâs total dividends for 2011 if it follows eachof the following policies:
(1)Its 2011 dividend payment is set to force dividends to grow atthe long-run growth rate in earnings.
(2) It continues the 2010 dividend payout ratio.
(3)It uses a pure residual policy with all distributions in theform of dividends (40% of the $8.4 million investment is financedwith debt).
(4)It employs a regular-dividend-plus-extras policy, with theregular dividend being based on the long-run growth rate and theextra dividend being set according to the residual policy.
b. Which of the preceding policies would you recommend? Restrictyour choices to the ones listed, but justify your answer.
c. Does a 2011 dividend of $9 million seem reasonable in view ofyour answers to parts a and b? If not, should the dividend behigher or lower?
a. Calculate Keenanâs total dividends for 2011 if it follows eachof the following policies:
(1)Its 2011 dividend payment is set to force dividends to grow atthe long-run growth rate in earnings.
(2) It continues the 2010 dividend payout ratio.
(3)It uses a pure residual policy with all distributions in theform of dividends (40% of the $8.4 million investment is financedwith debt).
(4)It employs a regular-dividend-plus-extras policy, with theregular dividend being based on the long-run growth rate and theextra dividend being set according to the residual policy.
b. Which of the preceding policies would you recommend? Restrictyour choices to the ones listed, but justify your answer.
c. Does a 2011 dividend of $9 million seem reasonable in view ofyour answers to parts a and b? If not, should the dividend behigher or lower?
Jean KeelingLv2
29 Sep 2019
