Question

Problem 14-10 Alternative Dividend Policies Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2016 Boehm paid dividends of $2.3 million on net income of $20.0 million. However, in 2017 earnings are expected to jump to $34 million, and Boehm plans to invest $14.2 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2017 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%. Calculate Boehm's total dividends for 2017 under each of the following policies: Its 2017 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 2016 dividend payout ratio. Round intermediate calculations to four decimal places. Round your answer to the nearest dollar. $ It uses a pure residual policy with all distributions in the form of dividends (35% of the $14.2 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. What will the extra dividend be? 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

Answer 1

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Home ert Page Layout Formulas Data Review V % Cut ta copy." Format Painter Add-Ins Σ AutoSum , Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Paste Sort &Find & Formatting as Table Styles ClearFilter Select Clipboard Font Styles Cells dting Alignment AJ272 AM Al AK AL AN AP AO 255 256 257 258 259 260 261 262 263 264 265 266 267 268 269 270 271 272 273 :4 トト , bond BOEHM STABLE EARNINGS GROWTH 8% FOR LAST 10 YEARS 2016 DIVIDEND 2016 EARNINGS- 2017 EARNINGs 2.3 MILLION 20 MILLION 34 MILLION 2018 ONWARDS, GROWTH RATE WILL RESTORE TO NORMAL LEVELS QUE 1 DIVIDEND IS SET TO FORCE DIVIDENDS TO GROW AT LONG RUN GROWTH RATE 2016 DIVIDEND 2.3 MILLION 2017 DIVIDEND 2.3 MILLION X (1+0.08) 2.484 MILLION 2484000 QUE 2 CONTINUE WITH 2016 DIVIDEND PAYOUT RATIO DIVIDEND PAYOUT RATIO-2.3 MILLION/20 MILLION * 100-11.50% PAYOUT RATIO SO FOR 2017-DIVIDEND-34 MILLION X 11.50%-3.91 MILLION 3910000 future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR stru WACC | RESI ex div DIV POLICY NAME Sheet1 E1 /> clean YIELD bond 14:29 멎园遛14..al t@ m木6 ENG 27-04-2019

Home ert Page Layout Formulas Data Review V 義Cut a copy ▼ Format Painter Add-Ins Σ AutoSum , General Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Paste Sort &Find & Formatting as Table Styles ClearFilter Select Clipboard Font Styles Cells dting Alignment AP287 AM Al AK AL AN AO Ap 273 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 :4 トト , bond QUE 3 PURE RESIDUAL POLICY EARNINGS FOR 2017 = INVESTMENT IN EQUITY (14.2 MILLIONX 65%)- RESIDUAL AMOUNT SO DIVIDEND AMOUNT TO BE DISTRIBUTED = 24.77 MILLION 34 MILLION 9.23 MILLION 24.77 MILLION LESS 24770000 QUE 4 REGULAR DIVIDEND PLUS EXTRAS POLICY EARNINGS FOR 2017- INVESTMENT IN EQUITY (14.2 MILLION× 65%)- RESIDUAL AMOUNT DIVIDEND AS PER LONG RUN GROWTH RATE- (AS CALCULATED IN QUE 1) EXTRA DIVIDEND 34 MILLION 9.23 MILLION 24.77 MILLION 2.484 MILLION LESS LESS 22.286 MILLION SO TOTAL DIVIDEND = 2.484 MILLION + 22.286 MILLION- 24770000 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 stru WACC | RESI ex div DIV POLICY NAME Sheet1 E1 /> t future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR clean YIELD bond 14:30 27-04-2019 멎园遛14 ! t@ m木6 ENG