Problem 14-10 Alternative Dividend Policies

Boehm Corporation has had stable earnings growth of 5% a year for the past 10 years and in 2016 Boehm paid dividends of $2.7 million on net income of $20.0 million. However, in 2017 earnings are expected to jump to $30 million, and Boehm plans to invest $15.8 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2017 Boehm will return to its previous 5% earnings growth rate. Its target debt ratio is 35%.

KEEP ALL DECIMAL PLACES FROM PREVIOUS QUESTIONS AS YOU CONTINUE CALCULATIONS.

A. Calculate Boehm's total dividends for 2017 under each of the following policies:

1. Its 2017 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest dollar. $____

2. It continues the 2016 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 $15.8 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.

$_______

B. Which of the preceding policies would you recommend? Restrict your choices to the ones listed.

Choose 1, 2, 3,or 4 from the list above.