Next year, Claremore Candy Company\'s (CCC\'s) earnings are expected to be $12.4

Question

Next year, Claremore Candy Company's (CCC's) earnings are expected to be $12.4 million, and the firm expects to have profitable investment opportunities of $8.6 million. Last year, the company paid dividends equal to $9.3 million. It is predicted that CCC will grow at a constant 5.87 percent in the future. What will be CCC's total dividends for next year if it follows:

(a) A policy that requires dividends to grow at the long-run growth rate in earnings.

(b) A pure residual dividend policy.

CCC's target debt/assets ratio is 45 percent.

Explanation / Answer

A. Next year dividend = dividend paid ( 1 + growth)

= 9.3( 1 + .0587)

=$9.85

B.total investment = $8.6 million

Equity = 55% = 4.73million

Total earnings = 12.4 million

Less equiity requirements . = 4.73 million

Residual amout = 7.67 million for dividend.payment.

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