Force dividends to grow at long run growth rate in earnings

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Reference no: EM131322768

Boehm corporation has had stabke earnings growth of 8% a year for thee past 10 years and in 2013 Boehm paid dividends of $2.6 millions on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one time unusual earnings growth won't be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%. a. Calculate Boehm's total dividends for 2014 under each of the folowing policies: 1. its 2014 dividend payment is set to force dividends to grow at the long run growth rate in earnings. 2. It continues the 2013 dividend payout ratio 3. It uses a pure residential policy with all distribution in the form of dividends (35% of teh $7.3 million investment is financed with debt) 4. It employs a regular divided plus extras policy, with the regular dividen being based on the long run growth rate and the extra dividend being set accoding to the residual policy. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed, but justify your answer. c. Does a 2014 dividend of $9 million seem reasonable in view of your answer to parts a and B? if not, should the dividend be higher or lower? Correct answers in book are: 1. $2,808,000 2. $3.34 million 3. $7,855,000 4. Regular: $2,808,000 Extra: $5,047,000 Please show all details of how to get these correct calculations.

Reference no: EM131322768

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