Question

OOOOOOO 15-7: Setting the Target Distribution Level: The Residual Distribution Model 15-8: The Residual Distribution Model in Practice Problem 15-10 Alternative Dividend Policies Boehm Corporation has had stable earnings growth of 6% a year for the past 10 years, and in 2015 Boehm paid dividends of $3.2 million on net income of $19.5 million. However, in 2016 earnings are expected to jump to $31.2 million, and Boehm plans to invest $15.6 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2016 Boehm will return to its previous 6% earnings growth rate. Its target debt ratio is 35%. a. Calculate Boch's total dividends for 2016 under each of the following policies: 1. Its 2016 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. 2. It continues the 2015 dividend payout ratio. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. 3. It uses a pure residual policy with all distributions in the form of dividends (35% of the $15.6 million investment is financed with debt). Round your answer to the nearest dollar Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. 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 policy. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed Select

Answer 1

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- 2x ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General Ea Copy Paste B I Format Painter U - D A Merge & Center $ - % 8.9 Formatting as Table Clipboard Font Alignment Number Styles AK556 foc AI AJ AK ALAM AN Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Styles Find & Select Cells AO AP 556 BOEHM 557 558 559 560 STABLE EARNINGS GROWTH = 6% FOR LAST 10 YEARS 561 2015 DIVIDEND = 3.2 MILLION 2015 EARNINGS = 19.5 MILLION 2016 EARNINGS = 31.2 MILLION 2017 ONWARDS, GROWTH RATE WILL RESTORE TO NORMAL LEVELS 562 563 564 565 566 567 QUE1 DIVIDEND IS SET TO FORCE DIVIDENDS TO GROW AT LONG RUN GROWTH RATE 2015 DIVIDEND = 3.2 MILLION 2016 DIVIDEND = 3.2*(1+0.06) = 3.392 MILLION 3392000 568 569 570 QUE 2 CONTINUE WITH 2015 DIVIDEND PAYOUT RATIO DIVIDEND PAYOUT RATIO = 3.2/19.5 = 16.4103% 571 572 573 SO FOR 2016 = DIVIDEND = 31.2 X 16.4103% = 5.12 5120000 574 N betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio cap stru WACC c oNvexity DGM ferences Red RESI ex div DIV POLICY NAME DIV YIELDI BOU 130% 0 B 9 . * . 40 ENG 20-11-2019 .

- 2x Σ AutoSum : A 2 A 2 Clear Sort & Find & Filter Select Editing ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11 A A = = = V vo Wrap Text Wrap Text General 1 A 1 Ea Copy Paste B I U - D A SF Merge Merge & Center Center $ - % % Format Painter 4:0 .00 8.9 Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells AP576 AL AJAK AL AM AN 576 QUE 3 PURE RESIDUAL POLICY 577 EARNINGS FOR 2016 = 31.2 MILLION 578 LESS INVESTMENT IN EQUITY (15.6 MILLION X 65%) = 10.14 MILLION 579 RESIDUAL AMOUNT 21.06 MILLION 580 SO DIVIDEND AMOUNT TO BE DISTRIBUTED = 21.06 MILLION 21060000 АО AP 581 582 QUE 4 583 LESS 584 585 REGULAR DIVIDEND PLUS EXTRAS POLICY EARNINGS FOR 2016= INVESTMENT IN EQUITY (15.6 MILLION X 65%) = RESIDUAL AMOUNT DIVIDEND AS PER LONG RUN GROWTH RATE = (AS CALCULATED IN QUE 1) EXTRA DIVIDEND 31.2 MILLION 10.14 MILLION 21.06 MILLION 3.392 MILLION LESS 586 587 588 17.668 MILLION 589 SO TOTAL DIVIDEND = 3.392 MILLION + 17.668 MILLION = 21060000 590 591 592 593 594 AS EARNINGS ARE GOING TO RISE ONLY FOR A YEAR, WE SHOULD FOLLOW REGULAR DIVIDEND POLICY THAT IS, THE LONG RUN GROWTH DIVIDEND POLICY SHOULD BE MAINTAINED SELECT CHOICE 1 betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio cap stru WACC N c oNvexity DGM ferences RESI ex div DIV POLICY NAME BOU 130% DIV YIELDI 0 Red DO 4 * 410 ENG 20-11-2019