Alternative Dividend Policies Boehm Corporation has had stable earnings growth o

Question

Alternative Dividend Policies Boehm Corporation has had stable earnings growth of 6% a year for the past 10 years and in 2016 Boehm paid dividends of $2.1 million on net income of $20.0 million. However, in 2017 earnings are expected to jump to $28 million, and Boehm plans to invest $14.6 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2017 Boehm will return to its previous 6% earnings growth rate. Its target debt ratio is 35% a. Calculate Boehm's total dividends for 2017 under each of the following policies: 1. Its 2017 dividend payment is set to force dividends to grow at the long-run growth rate in earnings Ro und your answer to the nearest doll 2. It continues the 2016 dividend payout ratio. Round intermediate calculations to four decimal places Ro und your answer to the nearest doll 3. It uses a pure residual policy with all distributions in the form of dividends (35% of the $14.6 million investment is financed with debt). Round your answer to the nearest dollar. 4. 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 dollar

Explanation / Answer

a)

1)

Long run growth rate in earnings = 6%

Current dividend , D0 = $ 2.1 M

Dividend in 2017 , D1 = D0*(1+6%) = $ 2.226 M

2)

2016 Dividend payout ratio = 2.1 M/20 = 10.5%

2017 dividend payout ratio = 10.5% * Earnings in 2017 = 10.5%* 28 M = $ 2.94 M

3)

Total debt in 2017 = 35% * 14.6 M = $ 5.11 M

Earnings in 2017 = $ 28 M

Total investment in 2017 = $ 14.6 M

Total Dividends in 2017= Earnings in 2017- (Total Investment in 2017 - Total debt in 2017) = 28-(14.6- 5.11) = $ 18.51 M

4)

Regular dividend= $2.226 M

Residual Dividend = $ 18.51 M

Extra dividend = 18.51-2.226 = $ 16 M

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