Alternative Dividend Policies
Boehm Corporation has had stable earnings growth of 4% a year for the past 10 years, and in 2015 Boehm paid dividends of $2.8 million on net income of $17.5 million. However, in 2016 earnings are expected to jump to $28 million, and Boehm plans to invest $14 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2016 Boehm will return to its previous 4% earnings growth rate. Its target debt ratio is 35%.
Calculate Boehm's total dividends for 2016 under each of the following policies:
Its 2016 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. $
It continues the 2015 dividend payout ratio. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. $
It uses a pure residual policy with all distributions in the form of dividends (35% of the $14 million investment is financed with debt). Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. $
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. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. $
Which of the preceding policies would you recommend?