Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e. D1 = $1.50). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rs, is 13%. What is the estimated value per share of Boehm?

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Joshua StredderLv10

21 Jan 2021

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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

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