Question

Alternative Dividend Policies

Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years, and in 2015 Boehm paid dividends of $3.1 million on net income of $20.0 million. However, in 2016 earnings are expected to jump to $36 million, and Boehm plans to invest $14.2 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 8% earnings growth rate. Its target debt ratio is 35%.

1. Calculate Boehm's total dividends for 2016 under each of the following policies:
   1. Its 2016 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000.
      $  
      
   2. It continues the 2015 dividend payout ratio. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000.
      $  
      
   3. It uses a pure residual policy with all distributions in the form of dividends (35% of the $14.2 million investment is financed with debt). Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000.
      $  
      
   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. Round your answer to the nearest dollar. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000.
      $  
   
   
2. Which of the preceding policies would you recommend? Restrict your choices to the ones listed.
   -Select-1234Item 5

Answer 1