Reference no: EM132681866

Alternative Dividend Policies

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.

1. 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.
2. It continues the 2019 dividend payout ratio. Round your answer to the nearest cent.
3. 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.
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 cent.
5. Which of the preceding policies would you recommend?