Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN: 9781337902571
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Textbook Question
Chapter 14, Problem 9P
ALTERNATIVE DIVIDEND POLICIES In 2018, Keenan Company paid dividends totaling $3,600,000 on net income of $10.8 million. Note that 2018 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2019, earnings are expected to jump to $14.4 million and the firm expects to have profitable investment opportunities of $8.4 million. It is predicted that Keenan will not be able to maintain the 2019 level of earnings growth because the high 2019 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2019, the company will return to its previous 10% growth rate. Keenan’s target capital structure is 40% debt and 60% equity.
- a. Calculate Keenan’s total dividends for 2019 assuming that it follows each of the following policies:
- 1. Its 2019 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.
- 2. It continues the 2018 dividend payout ratio.
- 3. It uses a pure residual dividend policy (40% of the $8.4 million investment is financed with debt and 60% with common equity).
- 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 dividend policy.
- b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify your answer.
- c. Assume that investors expect Keenan to pay total dividends of $9,000,000 in 2019 and to have the dividend grow at 10% after 2019. The stock’s total market value is $180 million. What is the company’s
cost of equity ? - d. What is Keenan’s long-run average
return on equity ? [Hint: g = Retention rate × ROE = (1.0 − Payout rate)(ROE)] - e. Does a 2019 dividend of $9,000,000 seem reasonable in view of your answers to parts c and d? If not, should the dividend be higher or lower? Explain your answer.
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In 2018, Keenan Company paid dividends totaling $3,600,000 on net income of $10.8 million. Note that 2018 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2019, earnings are expected to jump to $14.4 million and the firm expects to have profitable investment oppor tunities of $8.4 million. It is predicted that Keenan will not be able to maintain the 2019 level of earnings growth because the high 2019 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2019, the company will return to its previous 10% growth rate. Keenan's target capital structure is 40% debt and 60% equity.a. Calculate Keenan's total dividends for 2019 assuming that it follows each of the follow ing policies:1. Its 2019 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.2. It continues the 2018 dividend payout ratio.3. It uses a pure residual dividend…
Topic: Financial Planning & Forecasting
At year-end 2018, total assets for ABC Inc. were $1.8 million and accounts payable were $450,000. Sales, which in 2018 were $3 are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales (grow at the same rate). ABC typically uses no current liabilities other than accounts payable. Common stock amounted to $500,000 in 2018, and retained earnings were $475,000. ABC plans to sell new common stock in the amount of $130,000. The firm's profit margin on sales is 5%; 35% of earnings will be retained.
a. What were ABC's total liabilities in 2018?
b. How much new long-term debt financing will be needed in 2019?
(Hint: AFN - New stock = New long-term debt)
Morrissey Technologies Inc.'s 2019 financial statements are shown here.
Suppose that in 2020, sales increase by 10% over 2019 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2019 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its operating costs/sales ratio to 87.5% and increase its total liabilities-to-assets ratio to 30%. (It believes its liabilities- to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2020 forecasted interest-bearing debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 12.5%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.a. Construct the forecasted financial…
Chapter 14 Solutions
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Ch. 14 - Prob. 1QCh. 14 - Prob. 2QCh. 14 - Would it ever be rational for a firm to borrow...Ch. 14 - Modigliani and Miller (MM), on the one hand, and...Ch. 14 - Prob. 5QCh. 14 - One position expressed in the financial literature...Ch. 14 - Prob. 7QCh. 14 - What is the difference between a stock dividend...Ch. 14 - Most firms like to have their stock selling at a...Ch. 14 - Prob. 10Q
Ch. 14 - Prob. 11QCh. 14 - RESIDUAL DIVIDEND MODEL Altamonte...Ch. 14 - Prob. 2PCh. 14 - STOCK REPURCHASES Gamma Industries has net income...Ch. 14 - Prob. 4PCh. 14 - EXTERNAL EQUITY FINANCING Coastal Carolina Heating...Ch. 14 - RESIDUAL DIVIDEND MODEL Walsh Company is...Ch. 14 - DIVIDENDS Brooks Sporting Inc. is prepared to...Ch. 14 - Prob. 8PCh. 14 - ALTERNATIVE DIVIDEND POLICIES In 2018, Keenan...Ch. 14 - Prob. 10SPCh. 14 - Prob. 11ICCh. 14 - Prob. 1TCLCh. 14 - Prob. 2TCLCh. 14 - Prob. 3TCLCh. 14 - Investors are more concerned with future dividends...Ch. 14 - Prob. 5TCL
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