D westcengagenow.com/ilm/takeAssignment/takeAssignmentMain.do eBook Problem 15-9
ID: 2710394 • Letter: D
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D westcengagenow.com/ilm/takeAssignment/takeAssignmentMain.do eBook Problem 15-9 Alternative dividend policies In 2011 the Keenan Company paid dividends totaing $3,570,000 on net income of $16 million, Note that 2011 was a normal year and for the past 10 years, earnings have orown at a constant not be able to maintain the 2012 level of earmings growth because the high 2012 earnings level is attributable to an exceptionally grofitable new product ine introduced that year. Atter 2012, rate of 10%. However, in 2012, earnings are expected to jump to $22.4 milin and the firm expedts to have proftabie investment opportunities of $11.2 millon. It is predicted that keenan wil company will return to its previous 10% growth rate. Keenan's target capital structure is 40% debt and 60% eary, a. Calculate Keenan's total dividends for 2012 assumin g that it follows each of the following policies: (Write out your answers completely. For example, 25 milion should be entered as 25,000,000.) 1. Its 2012 dvidend payment is set to force dividends to grow at the long-run growth rate in eamings,. Round your answer to the e in earnings. Round your answer to the nearest cent. 2· It continues the 2011 dividend payout ratio. Round your answer to the nearest cent. It uses a pure residual dividend policy (40% of the $11.2 milion investment is financed with debt and 60% with common equity). 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 peicy Round your answer to the nearest cent. Regular-dividend Extra dividend b, which of the preceding policies would you recommend? e. Assume that investors expect keer ar to pay tatal dvidends of $10,000.000 in 2012 and to have the dvide d grow at 10% after 2012. The stock s total mariet saben izio mann i hace the company's cost of equity? Round your answer to two decimal placesExplanation / Answer
(1)
Long run earnings growth rate is the steady growth rate of 10%.
Dividends in 2012 = Dividend in 2011 x 1.10
= $3,570,000 x 1.10 = $3,927,000
(2)
2011 dividend payout = $3,570,000 / $16,000,000 [Net Income] = 24.54%
2012 dividend payment = Net income x 24.54% = $22,400,000 x 24.54% = $5,497,800
(3)
60% of $11.2 million = $6,720,000 is paid with equity.
Dividend payment is equal to Residual income left = Net income - $6,720,000 = $(22,400,000 - 6,720,000) = $15,680,000
(4)
(a) Regular dividend = $22,400,000 x 10% = $2,240,000
(b) Extra dividend = Dividend per Residual dividend policy - Regular dividend
= $(15,680,000 - 2,240,000) = $13,440,000
(5) I will suggest the 1st policy since it results in lowest amount of dollar dividends ($3,927,000), keeping in mind the firm's capital expenditure requirements next year.
NOTE: Out of 8 questions, the first 5 are answered.
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