Fundamentals of Financial Management, Concise Edition
10th Edition
ISBN: 9781337911054
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning US
expand_more
expand_more
format_list_bulleted
Videos
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.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
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…
Boehm Corporation has had stable earnings growth of 9% a year for the past 10 years and in 2018 Boehm paid dividends of $3.7 million on net income of $12.7 million. However, in 2019
earnings are expected to jump to $17.4 million, and Boehm plans to invest $9.398 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after
2019 Boehm will return to its previous 9% earnings growth rate. Its target debt ratio is 35%. Boehm has 1 million shares of stock.
a. Calculate Boehm's dividend per share for 2019 under each of the following policies:
1. Its 2019 dividend payment is set to force dividends per share to grow at the long-run growth rate in earnings. Round your answer to the nearest dollar.
$
2. It continues the 2018 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 $9.398 million…
Utilize the 2019 financial statements for Micron Industries provided on page 1 and assume that the company is currently operating below capacity, at 80%.Required: Prepare Pro-Forma statements for 2020 (rounding all figures to the nearest dollar) assuming: All costs/income/expenses and net working capital vary directly with sales/revenue. No new equity is raised. Sales are projected to increase by 15% The tax rate and the dividend payout ratio will remain constant. Interest Expense and Depreciation Expense will remain unchanged.Clearly state if Micron Industries will require external financing or would have excess financing in 2020, and how much.
Chapter 14 Solutions
Fundamentals of Financial Management, Concise Edition
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
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- DIVIDENDS Brooks Sporting Inc. is prepared to report the following 2019 income statement (shown in thousands of dollars). Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 320,000 shares of common stock outstanding, and its stock trades at 37 per share. a. The company had a 25% dividend payout ratio in 2018. If Brooks wants to maintain this payout ratio in 2019, what will be its per-share dividend in 2019? b. If the company maintains this 25% payout ratio, what will be the current dividend yield on the companys stock? c. The company reported net income of 1.35 million in 2018. Assume that the number of shares outstanding has remained constant. What was the companys per-share dividend in 2018? d. As an alternative to maintaining the same dividend payout ratio. Brooks is considering maintaining the same per-share dividend in 2019 that it paid in 2018. If it chooses this policy, what will be the companys dividend payout ratio in 2019? e. Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or to maintain the same per-share dividend? Explain.arrow_forwardRyan company has a goal that it’s earnings per share should increase by at least 3% each year; this goal has been attained every year over the past decade. As a result the market price per share of Ryan’s common stock also has increase each year. Last year (2018) Ryan’s EPS was $3. This year however is a different story. Because of decreasing sales preliminary computations at the end of 2019 show that EPS will be only $2.99 per share. You are the accountant for Ryan. Ryan’s controller Jim Nastic has come to you with some suggestions. He says, "I’ve noticed that the decrease in revenues has been primarily related to credit sales. Since we have fewer credit sales I believe we are justified in reducing bad debts expense from 4% to 2% of net sales. I also think that because of the decrease sales we won’t use our factory equipment as much so we can extend it’s estimated remaining life from 10 to 15 years for computing our straight line depreciation expense. Based on my calculations if we…arrow_forwardAt the end of the year 2020 Brown Bear Corporation paid dividends $3.39 per share. The company projects the following annual growth rates in dividends: Year Growth Rate 2021 13% 2022 13% 2023 13% 2024 11% 2025 6% 2026 4% From year 2027 onward growth in dividends is expected to remain constant at 3% per year. The required rate of return for this stock is 12.16%. Calculate the economic value of the stock now (end of the Year 2020).arrow_forward
- The sales revenue of Business Strategy Limited for 2019 is $100 million. The CEO told the sales director in December of 2019 that the board had set a target of $145 million in sales revenue for 2022 and expected that there should be stable annual growth of sales over the 3 years. The board expects the growth rate will be maintained continuously in future years. The market has the same expectation of the board. Business Strategy Limited is expected to pay dividend of $20 per common stock at the end of the year 2020. The market price of the common stock at the beginning of 2020 is $1,000.What is the required rate of return on Business Strategy Limited’s common stock?arrow_forwardMorrissey 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…arrow_forwardBoehm Corporation has had stable earnings growth of 7% a year for the past 10 years, and in 2019 Boehm paid dividends of $3 million on net income of $5 million. However, net income is expected to grow by 28% in 2020, and Boehm plans to invest $3.0 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2020 Boehm will return to its previous 7% earnings growth rate. Its target debt ratio is 34%. Boehm has 1 million shares of stock. Calculate Boehm's dividend per share for 2020 under each of the following policies: Its 2020 dividend payment is set to force dividends per share to grow at the long-run growth rate in earnings. Round your answer to the nearest cent. $ It continues the 2019 dividend payout ratio. Round your answer to the nearest cent. $ It uses a pure residual policy with all distributions in the form of dividends (34% of the $3.0 million investment is financed with debt). Round your answer to the nearest cent. $…arrow_forward
- The most recent financial statements for Hopington Tours Inc. follow. Sales for 2020 are projected to grow by 25%. Interest expense will remain constant, the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, and accounts payable Increase spontaneously with sales. The firm is operating at full capacity and no new debt or equity is issued. HOPINGTON TOURS INC. 2019 Statement of Comprehensive Income Other expenses Earnings before interest and taxes Interest paid Taxable income Taxes (30%) Net income Dividends Addition to retained earnings Current assets Accounts receivable Inventory Total Fixed assets Net plant and equipment Total assets Sales Costs Other expenses EBIT Interest Taxable income Taxes (30%) Net income Assets Dividends Add. to RE Current assets Cash HOPINGTON TOURS INC. Pro Forma Statement of Comprehensive Income 25 % Sales Growth $ Accounts receivable Inventory Total Total assets Fixed assets Net plant and equipment…arrow_forwardBoehm Corporation has had stable earnings growth of 7% a year for the past 10 years, and in 2019 Boehm paid dividends of $3 million on net income of $5 million. However, net income is expected to grow by 28% in 2020, and Boehm plans to invest $3.0 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2020 Boehm will return to its previous 7% earnings growth rate. Its target debt ratio is 34%. Boehm has 1 million shares of stock. Calculate Boehm's dividend per share for 2020 under each of the following policies: Its 2020 dividend payment is set to force dividends per share to grow at the long-run growth rate in earnings. Round your answer to the nearest cent.arrow_forwardAt the end of the year 2020 Brown Bear Corporation paid dividends $3.58 per share. The company projects the following annual growth rates in dividends: Year Growth Rate 2021 13% 2022 13% 2023 13% 2024 11% 2025 8% 2026 4% From year 2027 onward growth in dividends is expected to remain constant at 3% per year. The required rate of return for this stock is 12.06%. Calculate the economic value of the stock now (end of the Year 2020). Your Answer:arrow_forward
- The company expected to pay dividend of $4 at end of the coming year (December 2022). The historical growth pattern for dividends is as follows: Year Dividend per share ($) 2021 3.75 2020 3.50 2019 3.30 2018 3.15 2017 2.85 Compute the price of common stock for 31 December 2021, given that required rate of return is 16.22 percent.arrow_forwardBoehm Corporation has had stable earnings growth of 7% a year for the past 10 years, and in 2019 Boehm paid dividends of $2 million on net income of $5 million. However, net income is expected to grow by 34% in 2020, and Boehm plans to invest $3.5 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2020 Boehm will return to its previous 7% earnings growth rate. Its target debt ratio is 35%. Boehm has 1 million shares of stock. Calculate Boehm's dividend per share for 2020 under each of the following policies: -Its 2020 dividend payment is set to force dividends per share to grow at the long-run growth rate in earnings. Round your answer to the nearest cent. -It continues the 2019 dividend payout ratio. Round your answer to the nearest cent. -It uses a pure residual policy with all distributions in the form of dividends (35% of the $3.5 million investment is financed with debt). Round your answer to the nearest cent. -It employs a…arrow_forwardConsider the following information which relates to a given company: 2019 Value Item $6.09 Earnings Per Share Price Per Share (Common Stock) $41.34 $62.7 million Book Value (Common Stock Equity) 2.57 million Total Common Stock Outstanding $4.98 Dividend Per Share Analysts expect that the company could maintain a constant annual growth rate in dividends per share of 5.93% in the future, or possibly 7.51% for the next 2 years and 5.35% thereafter. In addition, it is expected that the risk of the firm, as measured by the risk premium on its stock, to increase immediately from 8.04% to 10.03%. Currently, the risk-free rate is 5.55%. Required: Assuming no growth in future dividends, and a required return of 16.21%, find the value per share of the firm's stock. $4 (ROUND YOUR ANSWER TO 2 DECIMAL PLACES. FOR EXAMPLE: 17.23)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Fundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Fundamentals Of Financial Management, Concise Edi...
Finance
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License