Question

In 2017, the Keenan Company paid dividends totaling S3,180,000 on net income of $14 million. Note that 2017 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 5%. However, in 2018, earnings are expected to jump to $21 million and the firm expects to have profitable investment opportunities of $12.6 million. It is predicted that Keenan will not be able to maintain the 2018 level of earnings growth because the high 2018 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2018, the company will return to its previous 5% growth rate. Keenan's target capital structure is 40% debt and 60% equity. a. Calculate Keenan's total dividends for 2018 assuming that it follows each of the following policies: 1. Its 2018 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Write out your answers completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent. 2. It continues the 2017 dividend payout ratio. Write out your answers completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent. 3. It uses a pure residual dividend policy (40% of the S12.6 million investment is financed with debt and 60% with common equity). Write out your answers completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent. 4. 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 dividend policy. Write out your answers completely. For example, 25 million should be entered as 25,000,000. Round your answers to the nearest cent.

Answer 1

	Dividend paid ($) in 2017	3,180,000
	Net Income ($) in 2017	14,000,000
	Dividend payout ratio in 2017	22.71%
a	Year	2018
	Net Income ($)	21,000,000
	Long run growth rate	5.00%
	Dividend paid ($) in 2017	3,180,000
	Dividend paid ($) in 2018	3,339,000
b	Year	2018
	Net Income ($)	21,000,000
	Dividend payout ratio	22.71%
	Dividend paid ($)	4,770,000
c	Total Investment	12,600,000
	Equity @ 60%	7,560,000
	Debt @ 40%	5,040,000
	Net Income ($)	14,000,000
	Net Income after investment ($)	6,440,000
	Residual dividend paid ($)	6,440,000
d	Regular dividend based on long run growth rate	3,339,000
	Net Income after investment ($)	6,440,000
	Residual Dividend	3,101,000
	Total Dividend paid	6,440,000