14-10 Alternative Dividend Policies--SECOND SUBMISSION The first time I submitte
ID: 2748802 • Letter: 1
Question
14-10 Alternative Dividend Policies--SECOND SUBMISSION
The first time I submitted this question 1 and 4 were answered incorrectly and I have provided answers for all questions and need the correct supporting work and formulas to support the answers that I provided.
Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million and Boehm plans to invest $7.3 million in a plant expansion. This one time unusual earnings growth wont be maintained though and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%.
a. calculate Boehms total dividends for 2014 under each of the following policies:
(1) its 2014 dividend payment is set to force dividends to grow at the long-run growth rate earnings.(Answer is $2,88,000--show work and formulas to support answer.)
(2) It continues the 2013 dividend payout ratio (Answer is $3.34 Million--show all work and formulas to support answers)
(3) It uses a pure residential policy with with all distribution in the form of dividends (35% of the $7.3 million investment is financed with debt) (Answer is $7,855,000--show all work and formula to support answer)
(4) It employs a regular dividend plus extra policy with the regular dividend being based on the long run growth rate and the extra dividend being set according to residual policy. (Answer is Regular = $2,808,000; Extra = $5,047,000--show all work and formulas to support answers)
b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify your answer.
c. Does a 2014 dividend of $9 million seem reasonable in view of your answers to parts a and b? If not should the dividend be higher or lower?
Explanation / Answer
In Millions
its 2014 dividend payment is set to force dividends to grow at the long-run growth rate earnings.
It continues the 2013 dividend payout ratio
It uses a pure residential policy with with all distribution in the form of dividends (35% of the $7.3 million investment is financed with debt)
It employs a regular dividend plus extra policy with the regular dividend being based on the long run growth rate and the extra dividend being set according to residual policy.
2013 Net Income 9.8 Dividend 2.6 Dividend payout 26.531% With Growth rate of 8% 2014 Net Income 9.8*1.08 10.584 Dividend Payout @ 26.531% 2.808Related Questions
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