Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings areexpected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This onetimeunusual earnings growth wont be maintained, though, and after 2014 Boehm will return to itsprevious 8% earnings growth rate. Its target debt ratio is 35%.

(a) It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3million investment is financed with debt).(b) It employs a regular-dividend-plus-extras policy, with the regular dividend being based on thelong-run growth rate and the extra dividend being set according to the residual policy.