PLEASE ANSWER ALL 9 QUESTIONS PLEASE. THANK YOU In 2011 the Keenan Company paid
ID: 2382377 • Letter: P
Question
PLEASE ANSWER ALL 9 QUESTIONS PLEASE. THANK YOU
In 2011 the Keenan Company paid dividends totaling $3,750,000 on net income of $17.5 million. Note that 2011 was a normal year and for the past 10 years, earnings have grown at a constant rate of 8%. However, in 2012, earnings are expected to jump to $24.5 million and the firm expects to have profitable investment opportunities of $13.3 million. It is predicted that Keenan will not be able to maintain the 2012 level of earnings growth because the high 2012 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2012, the company will return to its previous 8% growth rate. Keenan's target capital structure is 40% debt and 60% equity.
Calculate Keenan's total dividends for 2012 assuming that it follows each of the following policies: (Write out your answers completely. For example, 25 million should be entered as 25,000,000.)
Its 2012 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest cent.
$
It continues the 2011 dividend payout ratio. Round your answer to the nearest cent.
$
It uses a pure residual dividend policy (40% of the $13.3 million investment is financed with debt and 60% with common equity). 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. Round your answer to the nearest cent.
Which of the preceding policies would you recommend?
-Select-
Policy 1
Policy 2
Policy 3
Policy 4
Assume that investors expect Keenan to pay total dividends of $7,000,000 in 2012 and to have the dividend grow at 8% after 2012. The stock's total market value is $250 million. What is the company's cost of equity? Round your answer to two decimal places.
%
What is Keenan's long-run average return on equity? [Hint: g = Retention rate x ROE = (1.0 - Payout rate)(ROE).] Round your answer to two decimal places.
%
Does a 2012 dividend of $7,000,000 seem reasonable in view of your answers to parts c and d? If not, should the dividend be higher or lower?
-Select-
yes
no, it should be lower
no, it should be higher
Regular-dividend $ Extra dividend $Explanation / Answer
Calculate Keenan's total dividends for 2012 assuming that it follows each of the following policies: (Write out your answers completely. For example, 25 million should be entered as 25,000,000.)
Its 2012 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest cent.
Keenan's total dividends for 2012 = Keenan's total dividends for 2011*(1+Long Run Growth rate))
Keenan's total dividends for 2012 = 3750000*(1+8%)
Keenan's total dividends for 2012 = $ 4,050,000
It continues the 2011 dividend payout ratio. Round your answer to the nearest cent.
Dividend Payout ratio in 2011 = 3750000/17500000
Dividend Payout ratio in 2011 = 1.5/7
Keenan's total dividends for 2012 = Net Income in 2012*Dividend Payout ratio in 2011
Keenan's total dividends for 2012 = 24500000*1.5/7
Keenan's total dividends for 2012 = $ 5,250,000
It uses a pure residual dividend policy (40% of the $13.3 million investment is financed with debt and 60% with common equity). Round your answer to the nearest cent.
Residual Dividend Policy
Amount needed for Equity = 60%*13300000 = $ 7,980,000
Retained Earning Would be = Amount needed for Equity
Retained Earning Would be= $ 7,980,000
Keenan's total dividends for 2012 = Net Income in 2012-Retained Earning
Keenan's total dividends for 2012 = 24500000 - 7980000
Keenan's total dividends for 2012 = $ 16,520,000
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. Round your answer to the nearest cent.
Keenan's Regular dividends for 2012 = Keenan's total dividends for 2011*(1+Long Run Growth rate))
Keenan's Regular dividends for 2012 = 3750000*(1+8%)
Keenan's Regular dividends for 2012 = $ 4,050,000
Amount needed for Equity = 60%*13300000 = $ 7,980,000
Retained Earning Would be = Amount needed for Equity
Retained Earning Would be= $ 7,980,000
Keenan's Extra dividend for 2012 = Net Income in 2012-Retained Earning - Regular Dividend
Keenan's Extra dividend for 2012 = 24500000 - 7980000 - 4050000
Keenan's Extra dividend for 2012 = $ 12,470,000
Which of the preceding policies would you recommend?
Policy 4
Assume that investors expect Keenan to pay total dividends of $7,000,000 in 2012 and to have the dividend grow at 8% after 2012. The stock's total market value is $250 million. What is the company's cost of equity? Round your answer to two decimal places.
Company's cost of equity = total dividends/total market value + growth rate
Company's cost of equity = 7000000/250000000 + 8%
Company's cost of equity = 10.80%
What is Keenan's long-run average return on equity? [Hint: g = Retention rate x ROE = (1.0 - Payout rate)(ROE).] Round your answer to two decimal places.
Payout rate = Dividend/Net income
Payout rate = 7/24.5
Keenan's long-run average return on equity = g/ (1.0 - Payout rate)
Keenan's long-run average return on equity = 8%/(1- 7/24.5)
Keenan's long-run average return on equity = 11.20%
Does a 2012 dividend of $7,000,000 seem reasonable in view of your answers to parts c and d? If not, should the dividend be higher or lower?
no, it should be higher
Regular-dividend $4,050,000 Extra dividend $12,470,000Related Questions
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