ALTERNATIVE DIVIDEND POLICIES In 2015, Keenan Company paid dividends totaling $3,600,000 on net income of $10.8 million. Note that 2015 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2016, earnings are exported 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 2016 level of earnings growth because the high 2016 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2016, 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 2016 assuming that it follows 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.
- 2. It continues the 2015 dividend payout ratio.
- 3. It USOS 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 sot according to the residual dividend policy.
- a. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify your answer.
- b. Assume that investors expect Keenan to pay total dividends of $9,000,000 in 2016 and to have the dividend grow at 10% after 2016. The stock’s total market value is $100 million. What is the company’s
cost of equity ? - c. What is Keenan’s long-run average
return on equity ? [Hint: g = Retention rate × ROE = (1.0 – Payout rate)(ROE)] - d. Does a 2016 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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Chapter 14 Solutions
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
- ALTERNATIVE DIVIDEND POLICIES In 2014, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 million. Note that 2014 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2015, 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 Keenanwill not be able tomaintain the 2015 level of earnings growth because the high 2015 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2015, the company will return to its previous 10% growth rate. Keenans target capital structure is 40% debt and 60% equity. a. Calculate Keenans total dividends for 2015 assuming that it follows each of the following policies: 1. Its 2015 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2014 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 2015 and to have the dividend grow at 10% after 2015. The stocks total market value is 180 million. What is the companys cost of equity? d. What is Keenans long-run average return on equity? [Hint: g = Retention rate ROE =(1 0 Payout rate) (ROE).] e. Does a 2015 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.arrow_forwardALTERNATIVE DIVIDEND POLICIES In 2017, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 million. Note that 2017 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2018, earnings are expected to jump to 14.4 million and the firm expects to have profitable investment opportunities of 8.4 million. It Ls predicted that Keenan will not be able to maintain the 2018 level of earnings growth because the high 2018 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2018, the company will return to its previous 10% growth rate. Keenans target capital structure is 40% debt and 60% equity. a. Calculate Keenans total dividends for 2018 assuming that it follows each of the following policies: 1. Its 2018 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2017 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 2018 and to have the dividend grow at 10% after 2018. The stocks total market value is 180 million. What is the companys cost of equity? d. What is Keenans long-run average return on equity? [Hint: g - Retention rate ROE = (1.0 Payout rate)(ROE)] e. Does a 2018 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.arrow_forwardALTERNATIVE DIVIDEND POLICIES In 2013, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 million. Note that 2013 was a normal year and that tor the past 10 years, earnings have grown at a constant rate of 10%. However, in 2014, earnings are expected to jump to 10.4 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 2014 level of comings growth because the high 2014 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2014, the company will return to its previous 10% growth rate. Keenans target capital structure is 40% debt and 60% equity. a. Calculate Keenan s total dividends for 2014 assuming that it follows each of the following policies: 1. Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2013 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 you answer. c. Assume that investors expect Keenan to pay total dividends of 9,000,000 in 2014 and to have the dividend grow at 10% after 2014. The stocks total market value is 180 million. What is the companys cost of equity? d. What is Keenans long-run average return on equity? [Hint: g = Retention rate ROE (1.0 Payout rate (ROE).] e. Does a 2014 dividend of 9,000,000 seem, reasonable in view of your answers to Parte c and d? If not, should the dividend be higher or lower? Explain your answer.arrow_forward
- Munson Communications Company has just reported earnings for the year ended June 30, 2011. Below are the firm’s income statement and balance sheet. The Company had a 55 percent dividend payout ratio for the last 10 years and does not plan to change this policy. Based on internal forecasts, the company expects the demand for its products to grow at a rate of 21 percent for the next year and has projected the sales growth for 2012 to be 21 percent. Assume that equity accounts and long-term debt do not vary directly with sales, but change when retained earnings change or additional capital is issued. Munson Communications Company Balance Sheet as of June 30, 2011 Assets: Liabilities and Stockholders’ Equity: Cash $1,728,639 Accounts payables $4,666,673 Accounts receivables 3,009,421 Notes payables 2,507,094 Inventories 11,492,993 Total current assets $16,231,054 Total current liabilities $7,173,767 Net fixed assets 22,380,636 Long-term debt 13,345,242…arrow_forwardMunson Communications Company has just reported earnings for the year ended June 30, 2011. Below are the firm’s income statement and balance sheet. The Company had a 55 percent dividend payout ratio for the last 10 years and does not plan to change this policy. Based on internal forecasts, the company expects the demand for its products to grow at a rate of 21 percent for the next year and has projected the sales growth for 2012 to be 21 percent. Assume that equity accounts and long-term debt do not vary directly with sales, but change when retained earnings change or additional capital is issued. Munson Communications Company Balance Sheet as of June 30, 2011 Assets: Liabilities and Stockholders’ Equity: Cash $1,728,639 Accounts payables $4,666,673 Accounts receivables 3,009,421 Notes payables 2,507,094 Inventories 11,492,993 Total current assets $16,231,054 Total current liabilities $7,173,767 Net fixed assets 22,380,636 Long-term debt 13,345,242…arrow_forwardMunson Communications Company has just reported earnings for the year ended June 30, 2011. Below are the firm’s income statement and balance sheet. The Company had a 55 percent dividend payout ratio for the last 10 years and does not plan to change this policy. Based on internal forecasts, the company expects the demand for its products to grow at a rate of 27 percent for the next year and has projected the sales growth for 2012 to be 27 percent. Assume that equity accounts and long-term debt do not vary directly with sales, but change when retained earnings change or additional capital is issued. Munson Communications Company Balance Sheet as of June 30, 2011 Assets: Liabilities and Stockholders’ Equity: Cash $1,728,639 Accounts payables $4,666,673 Accounts receivables 3,009,421 Notes payables 2,507,094 Inventories 11,492,993 Total current assets $16,231,054 Total current liabilities $7,173,767 Net fixed assets 22,380,636 Long-term debt 13,345,242…arrow_forward
- Munson Communications Company has just reported earnings for the year ended June 30, 2011. Below are the firm’s income statement and balance sheet. The Company had a 55 percent dividend payout ratio for the last 10 years and does not plan to change this policy. Based on internal forecasts, the company expects the demand for its products to grow at a rate of 14 percent for the next year and has projected the sales growth for 2012 to be 14 percent. Assume that equity accounts and long-term debt do not vary directly with sales, but change when retained earnings change or additional capital is issued. Munson Communications Company Balance Sheet as of June 30, 2011 Assets: Liabilities and Stockholders’ Equity: Cash $1,728,639 Accounts payables $4,666,673 Accounts receivables 3,009,421 Notes payables 2,507,094 Inventories 11,492,993 Total current assets $16,231,054 Total current liabilities $7,173,767 Net fixed assets 22,380,636 Long-term debt 13,345,242…arrow_forward(Earnings Management) Bobek Inc. has recently reported steadily increasing income. The company reported income of $20,000 in 2014, $25,000 in 2015, and $30,000 in 2016. A number of market analysts have recommended that investors buy the stock because they expect the steady growth in income to continue. Bobek is approaching the end of its fiscal year in 2017, and it again appears to be a good year. However, it has not yet recorded warranty expense.Based on prior experience, this year’s warranty expense should be around $5,000, but some managers have approached the controller to suggest a larger, more conservative warranty expense should be recorded this year. Income before warranty expense is $43,000. Specifically, by recording a $7,000 warranty accrual this year, Bobek could report an increase in income for this year and still be in a position to cover its warranty costs in future years. Instructions(a) What is earnings management?(b) Assume income before warranty expense is $43,000…arrow_forward
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