Alternative Dividend Policies
Boehm Corporation has had stable earnings growth of 5% a year for the past 10 years, and in 2013 Boehm paid dividends of $2.6 million on net income of $16.0 million. However, in 2014 earnings are expected to jump to $22.4 million, and Boehm plans to invest $12.8 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2014 Boehm will return to its previous 5% earnings growth rate. Its target debt ratio is 35%.
Calculate Boehm's total dividends for 2014 under each of the following policies-
Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest dollar.
It continues the 2013 dividend payout ratio. Round your answer to the nearest dollar.
It uses a pure residual policy with all distributions in the form of dividends (35% of the $12.8 million investment is financed with debt). Round your answer to the nearest dollar.
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 policy. Round your answer to the nearest dollar.