Baggyboots Ltd currently has capital expenditures (project outlays for all foreseeable positive NPV projects) of $150 million per year, depreciation of 60 million per year and a net profit after tax of $95 million per year.  The company is confident that there will be no reduction in profitability in the future, and that these figures will all grow by 5% per year.  Baggyboots Ltd's most recent annual dividend was 50 cents per share.  There are 120 million shares outstanding and the company is 40% debt financed.

REQUIRED.

(a)   If the company chooses to run a pure residual dividend policy, what will be the dividend per share this year?

(b)  If, instead of a residual dividend policy, Baggyboots Ltd chooses to adopt a constant dollar dividend policy of 60 cents per share, what advice would you offer about this policy?  Is it reasonable?  Or is it unreasonable? Please furnish calculations with your answer.

(c)     Please explain the concept of a target dividend payout ratio calculate a target payout ratio for Baggyboots Ltd,.  Also please state clearly what assumptions enable you to make this target payout ratio forecast..  Please furnish calculations with your answer.

(d)    [No calculations are required for this part of the question.]  Explain how your answer would to (c) might change if the 10-year forecast of Baggyboots Ltd future NPATS has a mean of $95 million (in current dollar terms) and a standard deviation of 30%.  What would you advise given this extra information?