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Dividend Payout

The AA Corporation expects next year's net income to be $20 million. The firm's debt ratio is currently 50%. AA has $10 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual distribution model (assuming all payments are in the form of dividends), how large should AA's dividend payout ratio be next year? Round your answer to two decimal places.

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Elin Hessel
Elin HesselLv2
29 Sep 2019

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Residual Distribution Model

Plucky Products is planning for $3.3 million in capital expenditures next year. Plucky's target capital structure consists of 35% debt and 65% equity. If net income next year is $2.4 million and Plucky follows a residual distribution policy with all distributions as dividends, what will be its dividend payout ratio? Round your answer to two decimal places.

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

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