Excel Online Structured Activity: Dividend Policy

Boehm Corporation has had stable earnings growth of 9% a year for the past 10 years, and in 2015 Boehm paid dividends of $2.4 million on net income of $15.0 million. However, in 2016 earnings are expected to jump to $22.5 million, and Boehm plans to invest $10.5 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 9% 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.

1) Its 2016 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.

-Currently have $2,616,000 as an answer and it's CORRECT

2) It continues the 2015 dividend payout ratio.

-Currently have $3,600,000 and is CORRECT.

3) It uses a pure residual policy with all distributions in the form of dividends (35% of the $10.5 million investment is financed with debt).

-Currently have $2,616,000 and is INCORRECT

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?

-Currently have $2,616,000 and is INCORRECT

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Alternative Dividend Policies 10-year earnings growth 9.00% 2015 Dividends $2,400,000 2015 Net income $15,000,000 Expected 2016 Net income $22,500,000 Plant Expansion $10,500,000 Future earnings growth, after 2016 9.00% Debt ratio 35.00% Calculation of 2016 total dividends under different policies: Formulas 2016 dividends if dividends grow at long-run earnings growth rate #N/A 2016 dividends if continue 2015 dividend payout ratio #N/A 2016 dividends if it uses pure residual policy #N/A 2016 dividends under regular-dividend-plus-extras policy: Regular dividends (based on long-run earnings growth rate) #N/A Extra dividend (based on residual policy) #N/A