Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years, and in 2019 Boehm paid dividends of $4 million on net income of $10 million. However, net income is expected to grow by 28% in 2020, and Boehm plans to invest $7.5 million in a plant expansion. This one-time unusual earnings growth won’t be maintained, though, and after 2019 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 34%. Boehm has 1 million shares of stock.

a. Calculate Boehm’s dividends per share for 2020 under each of the following policies:

(1) Its 2020 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.

(2) It continues the 2019 dividend payout ratio.
(3) It uses a pure residual policy with all distributions in the form of dividends (34% of the $7.5 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.