Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Boehm Corporation has had stable earnings growth of 10% a year for the past 10 years, and in 2019 Boehm paid dividends of $3 million on net income of $10 million
Boehm Corporation has had stable earnings growth of 10% a year for the past 10 years, and in 2019 Boehm paid dividends of $3 million on net income of $10 million. However, net income is expected to grow by 30% in 2020, and Boehm plans to invest $7.0 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2020 Boehm will return to its previous 10% earnings growth rate. Its target debt ratio is 31%. Boehm has 1 million shares of stock.
- Calculate Boehm's dividend per share for 2020 under each of the following policies:Its 2020 dividend payment is set to force dividends per share to grow at the long-run growth rate in earnings. Round your answer to the nearest cent.
- $
- It continues the 2019 dividend payout ratio. Round your answer to the nearest cent.
- $
- It uses a pure residual policy with all distributions in the form of dividends (31% of the $7.0 million investment is financed with debt). Round your answer to the nearest cent.
- $
- 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 cent.
- $
- Which of the preceding policies would you recommend?
- -Select-1234Item 5
Expert Solution
1. )
Dividend payout ratio for 2019 = Dividend/Net Income
= $3 million /$10 million*100
= 30%
Income for 2020 at growth rate of 10% = ($10 million) + ($10 million*10%)
= $11 Million
Dividend for 2020 = $11 Million * 30%
= $3.3 Million
2.)
Dividend per share if 2019 dividend payout ratio continuous
Dividend = Net income * payout ratio
= [$10 Million + ($10 million * 30%)] * 30%
= $3.9 Million
3.)
Use of pure residual policy with all distribution in form of dividend
Total Investment = $7 Million
Debt finance = $7 Million * 31%
= $2.17 Million
Dividend for 2020 = Net Income - (Capital investment - Investment via debt financing)
Dividend = $13 Million - ($7 Million - $2.17 Million)
=8.17 million
4.)
Calculation of extra dividend
Total Dividend = Regular dividend at long run growth rate + extra dividend
Debt ratio = 31%
Equity ratio = 100% - 31%
= 69%
Extra Dividend = Net income - (Equity ratio * Investment)
= $10 Million - ($7 Million * 69%)
= 5.17 million
5.)
We should select choice 1 because earnings are going to rise only for a year. So, we should follow the regular dividend policy. That is long run growth dividend policy, it should be maintained.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
