Concept explainers
a)
1)
To determine: Total dividends of Company B for 2019, when dividend payments forces to grow at long-run growth rate in earnings.
a)
1)
Explanation of Solution
Given statement:
Past 10 year earnings is 8%,
Dividends paid in 2018 is $2.6 million,
Net income $9.8 million,
Earnings are expected to jump $12.6 million in 2019
Debt ratio is 35%
Calculation of total dividends for 2019:
Hence, total dividends in 2019 is $2,808,000
2)
To determine: Total dividends of Company B for 2019, when it continues the same dividend pay-out ratio of 2018.
2)
Explanation of Solution
Calculation of DPS in 2018:
For calculating total dividends paid in 2019, we must find pay-out ratio of 2018.
Therefore, pay-out ratio is 26.53%
Calculation of total dividends in 2019:
Hence, total dividends in 2019 are $3.34 million.
3)
To determine: Total dividends of Company B for 2019, when it utilizes pure residual policy in the form of dividends. (35% ($7.3million) financed by debt)
3)
Explanation of Solution
Debt financing is 35% then equity financing is 1-debt financing.
Calculation of total dividends in 2019:
Hence, total dividends in 2019 are $7,855,000
All of the equity finance is completed with re-invested
4)
To determine: Total dividends of Company B for 2019, when it uses regular dividend plus extras policy, regular dividend founded on long run growth and extras on residual policy.
4)
Explanation of Solution
Regular dividends would be 8% above the 2018 dividends.
The residual policy calls for $7,855,000. Therefore, the extra dividends would be,
Calculation of extra dividends:
Hence, extra dividends in 2019 are $5,047,000
Thus, an even higher use of excess funds may be a stock repurchase.
b)
To discuss: Policies recommended by person X to the company and restrict those to listed ones.
b)
Explanation of Solution
Policy number 4, supported the regular dividend with an extra, appears most reasonable. If this is implemented properly, it would lead to accurate capital budget and accurate financing of that budget, and it might offer correct signals to investors.
c)
To discuss: Whether the dividend in 2019 is $9,000,000 is reasonable from the results obtained in part (a) and (b).
c)
Explanation of Solution
A dividend of $9,000,000 in 2019 might be slightly low. It is observed that the capital budget is too substantial, and that more dividends ought to be paid out. Noticeably, it is true to make sure that the organization can be gaining low
In any case, if the current year’s projects resemble those of historical years, at that point the pay-out seems, by all accounts, to be marginally low.
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Chapter 15 Solutions
Intermediate Financial Management (MindTap Course List)
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