Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2016 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2017 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 2017 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%.

a. Calculate Boehm's total dividends for 2017 under each of the following policies:

(1) Its 2017 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.

(2) It continues the 2016 dividend payout ratio.

(3) It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3 million investment is financed with debt).

(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.

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