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QUESTION (4) DIVIDEND POLICY (20 marks) In 2018, ABC Company paid dividends of $2,400,000 on net income of $10,000,000. 2018 was a normal year, and
QUESTION (4) DIVIDEND POLICY (20 marks) In 2018, ABC Company paid dividends of $2,400,000 on net income of $10,000,000. 2018 was a normal year, and for the last four years, earnings have grown at a constant rate of 9%. However, in 2019, earnings are expected to jump to $13,500,000, and the firm expects to have a profitable investment opportunity of $9,000,000. It is predicted that ABC will not be able to maintain the 2019 level of growth. The high 2019 earnings level is attributable to an exceptional profitable new product line introduced that year. The company will return to its previous 9% growth rate in 2020. ABC Company's company target debt ratio is 40%. 1-Calculate ABC's dividend payment for 2019 if it follows each of the following dividend policies: i) 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. ii) It uses a pure residual dividend policy with all distributions in the form of dividends. (17 marks) 2-Which dividend policy would you recommend and give one reason for choosing that dividend policy? (3 marks) QUESTION (4) DIVIDEND POLICY (20 marks) In 2018, ABC Company paid dividends of $2,400,000 on net income of $10,000,000. 2018 was a normal year, and for the last four years, earnings have grown at a constant rate of 9%. However, in 2019, earnings are expected to jump to $13,500,000, and the firm expects to have a profitable investment opportunity of $9,000,000. It is predicted that ABC will not be able to maintain the 2019 level of growth. The high 2019 earnings level is attributable to an exceptional profitable new product line introduced that year. The company will return to its previous 9% growth rate in 2020. ABC Company's company target debt ratio is 40%. 1-Calculate ABC's dividend payment for 2019 if it follows each of the following dividend policies: i) 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. ii) It uses a pure residual dividend policy with all distributions in the form of dividends. (17 marks) 2-Which dividend policy would you recommend and give one reason for choosing that dividend policy
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