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Alternative Dividend Policies

Boehm Corporation has had stable earnings growth of 9% a year for the past 10 years and in 2018 Boehm paid dividends of $3.7 million on net income of $9.0 million. However, in 2019 earnings are expected to jump to $12.2 million, and Boehm plans to invest $7.2 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 9% earnings growth rate. Its target debt ratio is 35%. Boehm has 1 million shares of stock.

1. Calculate Boehm's dividend per share for 2019 under each of the following policies:
   1. 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.

      $

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

      $

   3. It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.2 million investment is financed with debt). Round your answer to the nearest dollar.

      $

   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. What will the extra dividend be? Round your answer to the nearest dollar.

      $

2. Which of the preceding policies would you recommend?

   -Select-1234Item 5

3. 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?
   1. No. As a regular dividend it should be lower than $9 million.
   2. No. As a regular dividend it should be higher than $9 million.
   3. Yes. As a regular dividend it should be equal to $9 million.