Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 15, Problem 9P
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.
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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…
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 18 percent for the next year and has projected the sales growth for 2012 to be 18 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…
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…
Chapter 15 Solutions
Fundamentals of Financial Management (MindTap Course List)
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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? 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