Question
Boehm Corporation has had stable earnings growth of 6% a year for the past 10 years, and in 2015 Boehm paid dividends of $3.2 million
Boehm Corporation has had stable earnings growth of 6% a year for the past 10 years, and in 2015 Boehm paid dividends of $3.2 million on net income of $20.0 million. However, in 2016 earnings are expected to jump to $32 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 2016 Boehm will return to its previous 6% earnings growth rate. Its target debt ratio is 35%.
The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.
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Calculate Boehm's total dividends for 2016 under each of the following policies. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. Do not round intermediate calculations. Round your answers to the nearest dollar.
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Its 2016 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.
$ fill in the blank 2
- It continues the 2015 dividend payout ratio.
$ fill in the blank 3
- 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).
$ fill in the blank 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. How much will the extra dividend be?
$ fill in the blank 5
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Which of the preceding policies would you recommend? Restrict your choices to the ones listed
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