in 2015, Seaworthy Dingy\'s earnings are expected to be $14.4 million, and the f
ID: 2633712 • Letter: I
Question
in 2015, Seaworthy Dingy's earnings are expected to be $14.4 million, and the firm expects to have profitable investment opportunities of $8.4 million. Last year the company paid dividends equal $9 million. It is predicted that Seaworthy will grow at a constant 5 percent in the future. What will be Seaworthys total dividends for 2015 if it follows a) a policy that requires dividends to grow at the long-run growth rate in earnings and B) a pure residual dividend policy. Seaworthy's target debt/assets ratio is 40 percent. Please explain answer.
Explanation / Answer
in 2015, Seaworthy Dingy's earnings are expected to be $14.4 million, and the firm expects to have profitable investment opportunities of $8.4 million. Last year the company paid dividends equal $9 million. It is predicted that Seaworthy will grow at a constant 5 percent in the future. What will be Seaworthys total dividends for 2015 if it follows
a) a policy that requires dividends to grow at the long-run growth rate in earnings
Since growth is 5%, dividend amount will grow by 5%.
2015 Dividends = 2014 Dividends + 5% increase = $9 million + ($9 million)(.05) = 9.45 Million
B) a pure residual dividend policy. Seaworthy's target debt/assets ratio is 40 percent. Please explain answer.
Total Profit = $14.4 million
Since it needs $8.4 million for investements and
Debt / assets = 0.40. 40% of the $8.4 million will be paide by taking on additional Debt.
This means 60% will be paid with the profit made for the year.
$8.4 million x 0.6 = $5.04 million to be paid from profit and before dividends.
Dividend amount = $14.4 million - $5.04 million = 9.36 million in dividends
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