close solutoin list

ALTERNATIVE 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. Keenan’s target capital structure is 40% debt and 60% equity. a. Calculate Keenan’s 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 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 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.

BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

Solutions

Chapter
Section
Chapter 15, Problem 9P
Textbook Problem

ALTERNATIVE 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. Keenan’s target capital structure is 40% debt and 60% equity.

  1. a. Calculate Keenan’s total dividends for 2018 assuming that it follows each of the following policies:
    1. 1. Its 2018 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.
    2. 2. It continues the 2017 dividend payout ratio.
    3. 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. 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.
  2. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify your answer.
  3. 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 stock’s total market value is $180 million. What is the company’s cost of equity?
  4. d. What is Keenan’s long-run average return on equity? [Hint: g - Retention rate × ROE = (1.0 − Payout rate)(ROE)]
  5. 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.

Expert Solution

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

See Solution

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Chapter 15 Solutions

Fundamentals of Financial Management (MindTap Course List)
Show fewer chapter solutions
Ch. 15 - Discuss the pros and cons of having the directors...Ch. 15 - The cost of retained earnings is less than the...Ch. 15 - Would it ever be rational for a form to barrow...Ch. 15 - Modigliani and Miller (MM), on the one hand, and...Ch. 15 - How would each of the following changes tend to...Ch. 15 - One position expressed in the financial literature...Ch. 15 - Executive salaries have been shown to be more...Ch. 15 - What the difference between a stock dividend and a...Ch. 15 - Most firms like to have their stock selling at a...Ch. 15 - Indicate whether the following statements are true...Ch. 15 - What is meant by catering theory, and how might it...Ch. 15 - RESIDUAL DIVIDEND MODEL Altamonte...Ch. 15 - STOCK SPLIT Emergency Medical's stock trades at...Ch. 15 - STOCK REPURCHASES Gamma Industries has net income...Ch. 15 - STOCK SPLIT After a 5-for-l stock split, Tyler...Ch. 15 - EXTERNAL EQUITY FINANCING Coastal Carolina Heating...Ch. 15 - RESIDUAL DIVIDEND MODEL Walsh Company is...Ch. 15 - DIVIDENDS Brooks Sporting Inc. is prepared to...Ch. 15 - ALTERNATIVE DIVIDEND POLICIES Rubenstein Bros....Ch. 15 - ALTERNATIVE DIVIDEND POLICIES In 2017, Keenan...Ch. 15 - RESIDUAL DIVIDEND MODEL Buena Terra Corporation is...Ch. 15 - DIVIDEND POLICY Southeastern Steel Company (SSC)...Ch. 15 - Use online resources to work on this chapter's...Ch. 15 - Use online resources to work on this chapter's...Ch. 15 - Use online resources to work on this chapter's...Ch. 15 - Use online resources to work on this chapter's...Ch. 15 - Use online resources to work on this chapter's...Ch. 15 - Use online resources to work on this chapter's...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions
What are the two main causes of market failure? Give an example of each.

Principles of Macroeconomics (MindTap Course List)

29. What arc retained earnings?

Cornerstones of Financial Accounting

What is the function of the trial balance?

College Accounting, Chapters 1-27

Describe the three types of accounting changes.

Intermediate Accounting: Reporting And Analysis

BREAKEVEN AND LEVERAGE Wingler Communications Corporation (WCC) produces premium stereo headphones that sell fo...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)