Reference no: EM132782248

Alternative Dividend Policies In 2015, Sytek Environmental paid dividends totalling $2.6 million on net income of $9.8 million. 2015 was a normal year, and for the past 10 years, earnings have grown at a constant rate of 8%. However, in 2016, earnings are expected to jump to $12.6 million, and the firm expects to have profitable investment opportunities of $7.3 million. It is predicted that Sytek will not be able to maintain the 2016 level of earnings growth-the high 2016 earnings level is attributable to an exceptionally profitable new product line introduced that year-and the company will return to its previous 8% growth rate. Sytek's target debt ratio is 35%.

Problem 1. Calculate Sytek's total dividends for 2016 if it follows each of the following policies:

1 Its 2016 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.

2 It continues the 2015 dividend payout ratio.

3 It uses a pure residual policy with all distributions in the form of dividends.

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.

Problem 2. Which of the preceding policies would you recommend? Restrict your choices to the ones listed, but justify your answer.