Boehm Corporation has had stable earnings growth of 6% a year for the past 10 years, and in 2015 Boehm paid dividends of $2.5 million on net income of $15.0 million. However, in 2016 earnings are expected to jump to $22.5 million, and Boehm plans to invest $11.1 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 6% earnings growth rate. Its target debt ratio is 35%.
a. Calculate Boehm's total dividends for 2016 under 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. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000.
$ ______________
2) 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.
$ ______________
3) It uses a pure residual policy with all distributions in the form of dividends (35% of the $11.1 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.
$ ______________
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. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000.
$ ______________
b.Which of the preceding policies would you recommend? Restrict your choices to the ones listed.
a. 1
b. 2
c. 3
d. 4