Log in
Finance
1
answer
0
watching
135
views
12 Feb 2019


In 2010, the Franklin Company paid dividends totaling $4 million on net income of $10.8 million. The year was a normal one, and earnings have grown at a constant rate of 10% for the past 10 years. However, in 2011, earnings are expected to jump to $16.2 million, and the firm expects to have profitable investment opportunities of $8.4 million. It is predicted that Franklin will not be able to maintain the 2011 level of earnings growth

Watch
1
answer
0
watching
135
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Keith Leannon
Keith LeannonLv2
15 Feb 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

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 growth—the high 2011projected earnings level is due to an exceptionally profitable newproduct line to be introduced that year—and then the company willreturn to its previous 10% growth rate. Keenan’s target debt ratiois 40%.
a. Calculate Keenan’s 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?

ALTERNATIVE DIVIDEND POLICIES In 2015, Keenan Company paid dividends totaling $3,600,000 on net income of $10.8 million. Note that 2015 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2016, earnings are expected to jump to $14.4 million and the firm expects to have profitable investment opportunities of $8.4 million. It is predicted that Keenan will not be able to maintain the 2016 level of earnings growth because the high 2016 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2016, the company will return to its previous 10% growth rate. Keenan’s target capital structure is 40% debt and 60% equity.

9a. Assume that investors expect Keenan to pay total dividends of $9,000,000 in 2016 and to have the dividend grow at 10% after 2016. The stock’s total market value is $180 million. What is the company’s cost of equity?

9b. What is Keenan’s long-run average return on equity? [Hint: ]

9c. Does a 2016 dividend of $9,000,000 seem reasonable in view of your answers to parts c and d? If not, should the dividend be higher or lower? Explain your answer.

In 2011 the Keenan Company paid dividends totaling $3,760,000 on net income of $15 million. Note that 2011 was a normal year and for the past 10 years, earnings have grown at a constant rate of 6%. However, in 2012, earnings are expected to jump to $19.5 million and the firm expects to have profitable investment opportunities of $10.8 million. It is predicted that Keenan will not be able to maintain the 2012 level of earnings growth because the high 2012 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2012, the company will return to its previous 6% growth rate. Keenan's target capital structure is 40% debt and 60% equity.

  1. Calculate Keenan's total dividends for 2012 assuming that it follows each of the following policies: (Write out your answers completely. For example, 25 million should be entered as 25,000,000.)

    1. Its 2012 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest cent.
      $

    3. It continues the 2011 dividend payout ratio. Round your answer to the nearest cent.
      $

    5. It uses a pure residual dividend policy (40% of the $10.8 million investment is financed with debt and 60% with common equity). Round your answer to the nearest cent.
      $

    7. Assume that investors expect Keenan to pay total dividends of $6,000,000 in 2012 and to have the dividend grow at 6% after 2012. The stock's total market value is $220 million. What is the company's cost of equity? Round your answer to two decimal places.
      %

    9. What is Keenan's long-run average return on equity? [Hint: g = Retention rate x ROE = (1.0 - Payout rate)(ROE).] Round your answer to two decimal places.
      %
    10. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy. Round your answer to the nearest cent.

      Regular-dividend $
      Extra dividend $


Related Documents

FIN 401
Final Exam
Study Guide
FIN 401 Study Guide - Midterm Guide: Net Present Value, Capital Budgeting, Net Income
harlequinswan221
FIN 300 Lecture Notes - Lecture 2: Price–Earnings Ratio, Asset Turnover, Inventory Optimization
indigolizard188
FIN 300 Chapter Notes - Chapter 4: Asset Turnover, Profit Margin, Dividend Payout Ratio
greyporcupine303

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in