Alternative Dividend Policies

Boehm Corporation has had stable earnings growth of 10% a year for the past 10 years, and in 2019 Boehm paid dividends of $3 million on net income of $5 million. However, net income is expected to grow by 30% in 2020, and Boehm plans to invest $4.0 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2020 Boehm will return to its previous 10% earnings growth rate. Its target debt ratio is 34%. Boehm has 1 million shares of stock.

1. Calculate Boehm's dividend per share for 2020 under each of the following policies:
   1. Its 2020 dividend payment is set to force dividends per share to grow at the long-run growth rate in earnings. Round your answer to the nearest cent.

      $

   2. It continues the 2019 dividend payout ratio. Round your answer to the nearest cent.

      $

   3. It uses a pure residual policy with all distributions in the form of dividends (34% of the $4.0 million investment is financed with debt). Round your answer to the nearest cent.

      $

   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. What will the extra dividend be? Round your answer to the nearest cent.

      $

2. Which of the preceding policies would you recommend?

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