Problem 17-10
Alternative Dividend Policies
Boehm Corporation has had stable earnings growth of 7% a year for the past 10 years, and in 2012 Boehm paid dividends of $2.4 million on net income of $10.0 million. However, in 2013 earnings are expected to jump to $17 million, and Boehm plans to invest $7.8 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2013 Boehm will return to its previous 7% earnings growth rate. Its target debt ratio is 35%.
Calculate Boehm's total dividends for 2013 under each of the following policies:
Its 2013 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest dollar.
$
It continues the 2012 dividend payout ratio. Round your answer to the nearest dollar.
$
It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.8 million investment is financed with debt). Round your answer to the nearest dollar.
$
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 dollar.
$
Which of the preceding policies would you recommend? Restrict your choices to the ones listed.
-Select-1234Item 5
Problem 17-10
Alternative Dividend Policies
Boehm Corporation has had stable earnings growth of 7% a year for the past 10 years, and in 2012 Boehm paid dividends of $2.4 million on net income of $10.0 million. However, in 2013 earnings are expected to jump to $17 million, and Boehm plans to invest $7.8 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2013 Boehm will return to its previous 7% earnings growth rate. Its target debt ratio is 35%.
Calculate Boehm's total dividends for 2013 under each of the following policies:
Its 2013 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest dollar.
$
It continues the 2012 dividend payout ratio. Round your answer to the nearest dollar.
$
It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.8 million investment is financed with debt). Round your answer to the nearest dollar.
$
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 dollar.
$
Which of the preceding policies would you recommend? Restrict your choices to the ones listed.
-Select-1234Item 5
Related questions
Alternative dividend policies
In 2011 the Keenan Company paid dividends totaling $3,800,000 on net income of $11 million. Note that 2011 was a normal year and for the past 10 years, earnings have grown at a constant rate of 8%. However, in 2012, earnings are expected to jump to $19.8 million and the firm expects to have profitable investment opportunities of $8.8 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 8% growth rate. Keenan's target capital structure is 40% debt and 60% equity.
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.)
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.
$
It continues the 2011 dividend payout ratio. Round your answer to the nearest cent.
$
It uses a pure residual dividend policy (40% of the $8.8 million investment is financed with debt and 60% with common equity). Round your answer to the nearest cent.
$
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 | $ |
Which of the preceding policies would you recommend?
policy 1
policy 2
policy 3
policy 4
Assume that investors expect Keenan to pay total dividends of $9,000,000 in 2012 and to have the dividend grow at 8% after 2012. The stock's total market value is $180 million. What is the company's cost of equity? Round your answer to two decimal places.
%
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.
%
Does a 2012 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?
yes
no it should be lower
no it should be higher
