Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2016 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2017 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million dollars in a plant expansion. This one time unusual earnings growth wont be maintained, though, and after 2017 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%.

A. Calculate Boehms total dividends for 2017 under each of the following policies:

(1) Its 2017 dividend payment is set to force dividends to grow at the lung-run growth rate earnings.

(2) It continues the 2016 dividend payout rates.

(3) It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3 million investment is financed with debt).

(4) It employs a regular-dividend-plus-extras policy, with a regular dividend being based on the long run growth rate and the extra dividends being set according to the residual policy.

B. Which of the following proceeding policies would you recommend? Restrict your choices to the ones listed, but justify your answer.

C. Does a 2017 dividends of $9 million seems reasonable in view of your answers to Parts A and B? If not, should the dividends be higher or lower?