Purchase Solution

Alternative Dividend Policy

Not what you're looking for?

Ask Custom Question

In 2008 the Keenan Company paid dividends $3.6 million on net income of $10.8 million. The year was normal, and for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2009, earnings are expected to jump to $14.4 million, and the firm expects to have profitable investments opportunities of $8.4 million. It is predictable that Keenan will not be able to maintain the 2009 level of earnings growth - the high 2009 earning level is attributable to an exceptionally profitable new product line introduced that year- and the company will return to its previous 10% growth rate. Keenan's target debt ratio is 40%.

a. calculate Keenan's total dividends for 2009 if it follows each of the following policies:

1. Its 2009 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.
2. It continues the 2008 dividend payout ratio.
3. It uses a pure residual policy with all distributions in the form of dividends (40% of the $8.4 million investment is financed with debt).
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 policy.

b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify your answer.
c. Does a 2009 dividend of $9 million seem reasonable in view of your answers to a and b? If not, should the dividends be higher or lower?

The answers to questions a are
1 $3,960,000
2 $4,800,000
3 $9,360,000
4 Regular= $3,960,000
Extra= $5,400,000

I need to show the work. Show formulas used.

Purchase this Solution

Solution Summary

Alternative dividend policies are examined.

Solution Preview


Question A1
3,600,000 x (1 + 10%) = 3,960,000

Question A2
3,600,000 / 10,800,000 x 14,400,000 = 4,800,000

Question A3
14,400,000 - ...

Purchase this Solution

Free BrainMass Quizzes
Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce