Alternative Dividend Policies

Boehm Corporation has had stable earnings growth of 5% a year for the past 10 years and in 2018 Boehm paid dividends of $2.8 million on net income of $20.0 million. However, in 2019 earnings are expected to jump to $23.9 million, and Boehm plans to invest $15.4 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 5% earnings growth rate. Its target debt ratio is 35%. Boehm has 1 million shares of stock.

Calculate Boehm's dividend per share for 2019 under each of the following policies:

Its 2019 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 dollar. $ ?

It continues the 2018 dividend payout ratio. Round intermediate calculations to four decimal places. Round your answer to the nearest dollar. $ ?

It uses a pure residual policy with all distributions in the form of dividends (35% of the $15.4 million investment is financed with debt). Round your answer to the nearest dollar. $ ?

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 dollar. $ ?

Which of the preceding policies would you recommend? (Answers: 1, 2, 3, 4)

Does a 2019 dividend of $9 million seem reasonable in view of your answers to parts a and b? If not, should the dividend be higher or lower? (Answers: No. As a regular dividend it should be lower than $9 million; No. As a regular dividend it should be higher than $9 million; Yes. As a regular dividend it should be equal to $9 million)