Barrhaven International has 40,000 shares outstanding with a market price of $80 per share. Onthe balance sheet, common stock is $120,000 and retained earnings are $845,000. There are notransaction costs. Earnings for the year are expected to be $170,000. Assume each question isindependent unless otherwise specified.
- Suppose Barrhaven International follows a strict residual dividend policy. Calculate thedividend per share they will pay if planned investments for this year are $150,000.Barrhaven International has a target D/E ratio of 0.25.
- Suppose Barrhaven International declares a dividend per share of $.80 this year and a$.40 per share dividend next year. You own 300 shares of the stock and you do not wantany dividend this year but as much dividend income as possible next year. If yourrequired return on this stock is 10 percent, what will your total homemade dividend benext year? Ignore taxes.
- Discuss the importance of dividend policy in the context of homemade dividends. Do youthink dividend policy is irrelevant in practice? Why or why not?