Question

In 2013 the Keenan company pay dividends totalling $2,030,000 on net income of $18.5 million. Note that 2013 was a normal year and for the past 10 years, earnings have grown at a constant rate of 5%. However, in 2014, earnings are expected to jump to $25.9 million and the firm expects to have profitable investment opportunities of $14.8 million. It is predicted that Keenan will not be able to maintain the 2014 level of earnings growth because the high 2014 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 1014, the company will return to its previous 5% growth rate. Kenyans target capital structure is 40% debt and 60% equity.

a. Calculate Keenan's total dividends for 2014
1. It's 2014 dividend payment is set to force dividends to grow at the long run growth rate in earnings round your answer to the nearest cent

2. It continues the 2013 dividend payout ratio round your answer to the nearest cent

3. It uses a pure residual dividend policy (40% of the $14.8 million investment is financed with debt and 60% with common equity). Round your answer to the nearest cent

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
regular dividend =
extra dividend =

b. Which of the preceding policies would you recommend? Policy 1,2,3 or 4?

c. Assume that investors expect Keenan to pay total dividends of $8 million in 2014 and to have the divided grow at 5% after 2014. The stock's total market value is $160 million. what is the company's cost of equity? answer should be %

d. What is Keenan's long run average return on equity? Answer should be percent

e. Does a 2014 dividend of $8,000,000 seem reasonable in view of your answers to parts C and D? If not should the dividend be higher or lower?
yes
no, it should be lower
no, it should be higher

Answer 1

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