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west.cengagenovw .com/ilrn/takeAssignment/takeAssignmentMain.do?inwoker-assignments&takeAssignmen; assignment-take eBook Problem 15-9 Alternative dividend policies In 2011 the Keenan Company paid dividends totaling $3,570,000 on net income of $16 million rate of 10%. However, in 2012, earnings are expected to jump to $22.4 mln and the firm expects to have not be able to maintain the 2012 level of earnings growth because the high 2012 earnings company wil return to its previous 10% growth rate. Keenan's pany paid dvidends totaling $3,570,000 on net income of $16 million. Note that 2011 was a normal year and for the past 10 years, earnings have grown at a constant t profitatle investment opportunities of $11.2 milion, It is prodicted that Keenan wil t level is attributable to an exceptionally profitable new product ine introduced that year. After 2012, the target agital structure is 40% debt and 60% equity Calculate Keenan's total dividends for 20 25,000,000.) 012 assuming that it follows each of the folowing policies: (Write out your answers completely. For example, 25 million should be entered as 1. 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. $ | 39270. 2. It continues the 2011 dividend payout ratio. Round your answer to the nearest cent. 549781 3 3. It uses a pure residual dividend polcy 40% of the $11.2 milion investment is financed with debt and 60% with com mon ea tv. Round your answer to the nearest cent. 15680. 4. It employs a reqular-dividend-plus-extras policy, with the reqular 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. Regular-dividend 2240013 Extra dividend Extra dividend S 11753 117531 b. Which of the preceding policies would you recommend? Assume that investors expect Keenan to pay total dvidends the com pany's cost of equity? Round your ansiver to two decimai places C $10,000,000 in 2012 and to have the d í d ir t 10% ater 2012 rhe t asteal adet al h 12 e ao whatExplanation / Answer
Dividend as per 2011 dividend payout ratio = $4998000. Dividend payout ratio of 2011 = 3570000 / 16000000 = 0.223125. Dividend for 2012 = 0.223125 x 22400000 = $4998000
Regular dividend = $3927000
Ans c - Copst of equity = 10000000 / 230000000 = 4.35%
Not sure about d. But it should be equal to the dividend payout ratio of 2011 i.e., 22.31%
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