Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
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.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
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…
PROBLEM 7-F BUDGETED NET INCOME
Reima Inc. 2016 income statement is presented below.
P3,500,00
Sales
Operating Costs
2,500,000
Earnings before interest and taxes P1,000,00
Interest expense
200,000
Earnings before taxes
P800,000
Income tax (40%)
320,000
Net Income
P480,000
You have collected the following information regarding Impi industrula Corporation's historical earnings per share.
2012 =R12.36
2013= R13.60
2014 =R15.82
2015= R17.80
2016= R20.90
2017 = R21.78
Based on your analysis of Impu's fundamentals you estimate that the firm's earnings will continue to grow at its average historical growth rate for the next year but that in the following year, as a result of the launch of a new product the form is currently developing, earnings will grow at a rate of 20% per year for two years. After this, you project that the earnings growth rate will decrease by 5% per year for the next two years, to its long term sustainable rate. You project that the firm will maintain a 50% dividend pay-out ratio and that the appropriate market capitalization rate for Impi Industrial Corporation is 15%. What action would yoh take if the firm's shares are currently trading at R620 per share?
Chapter 15 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 15 - Discuss the pros and cons of having the directors...Ch. 15 - Prob. 2QCh. 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 - Prob. 7QCh. 15 - What the difference between a stock dividend and a...Ch. 15 - Most firms like to have their stock selling at a...Ch. 15 - Prob. 10Q
Ch. 15 - What is meant by catering theory, and how might it...Ch. 15 - RESIDUAL DIVIDEND MODEL Altamonte...Ch. 15 - Prob. 2PCh. 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 - Prob. 11ICCh. 15 - Prob. 1TCLCh. 15 - Use online resources to work on this chapter's...Ch. 15 - Prob. 3TCLCh. 15 - Prob. 4TCLCh. 15 - Use online resources to work on this chapter's...Ch. 15 - Use online resources to work on this chapter's...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- You have collected the following information regarding Impi Industrial Corporation’s historical earnings per share 2012 R 12.36 2013 R 13.60 2014 R15.82 2015 R 17.80 2016 R 20.90 2017 R21. 78 Based on your analysis of Impi’s fundamentals you estimate that the firm’s earnings will continue to grow at its average historical growth rate for the next year but that in the following year, as a result of the launch of a new product the firm is currently developing, earnings will grow at a rate of 20% per year for two years. After this, you project that the earnings growth rate will decrease by 5% per year for the next two years, to its long-term sustainable rate. You project that the firm will maintain a 50% dividend payout ratio and that the appropriate market capitalization rate for Impi Industrial Corporation is 15%. What action would you take if the firm’s shares are currently trading at R620 per share?arrow_forwardYou have collected the following information regarding Impi Industrial Corporation’s historical earnings per share 2012 R 12.36 2013 R 13.60 2014 R15.82 2015 R 17.80 2016 R 20.90 2017 R21. 78 Based on your analysis of Impi’s fundamentals you estimate that the firm’s earnings will continue to grow at its average historical growth rate for the next year but that in the following year, as a result of the launch of a new product the firm is currently developing, earnings will grow at a rate of 20% per year for two years. After this, you project that the earnings growth rate will decrease by 5% per year for the next two years, to its long-term sustainable rate. You project that the firm will maintain a 50% dividend pay-out ratio and that the appropriate market capitalisation rate for Impi Industrial Corporation is 15%. What action would you take if the…arrow_forwardYou have collected the following information regarding Impi Industrial Corporation’s historical earnings per share 2012 R 12.36 2013 R 13.60 2014 R15.82 2015 R 17.80 2016 R 20.90 2017 R21. 78 Based on your analysis of Impi’s fundamentals you estimate that the firm’s earnings will continue to grow at its average historical growth rate for the next year but that in the following year, as a result of the launch of a new product the firm is currently developing, earnings will grow at a rate of 20% per year for two years. After this, you project that the earnings growth rate will decrease by 5% per year for the next two years, to its long-term sustainable rate. You project that the firm will maintain a 50% dividend pay-out ratio and that the appropriate market capitalisation rate for Impi Industrial Corporation is 15%. What action would you take if the…arrow_forward
- 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…arrow_forwardAlternative dividend policies Over the last 10 years, a firm has had the earnings per share shown in the following table: a. If the firm's dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, what would be the annual dividend for 2017? b. If the firm had a dividend payout of $1.00 per share, increasing by $0.10 per share whenever the dividend payout fell below 50% for two consecutive years, what annual dividend would the firm pay in 2017? c. If the firm's policy were to pay $0.50 per share each period except when earnings per share exceed $3.00, when an extra dividend equal to 80% of earnings beyond $3.00 would be paid, what annual dividend would the firm pay in 2017? d. Discuss the pros and cons of each dividend policy described in parts a through c. a. If the firm's dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, the annual dividend for 2017 is $0.35…arrow_forwardMunson 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…arrow_forward
- 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…arrow_forwardMunson 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 27 percent for the next year and has projected the sales growth for 2012 to be 27 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…arrow_forwardMunson 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 14 percent for the next year and has projected the sales growth for 2012 to be 14 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…arrow_forward
- Quantitative Problem: Beasley Industries' sales are expected to increase from $4 million in 2017 to $5 million in 2018, or by 25%. Its assets totaled $2 million at the end of 2017. Beasley is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2017, current liabilities are $750,000, consisting of $120,000 of accounts payable, $350,000 of notes payable, and $280,000 of accrued liabilities. Its profit margin is forecasted to be 4%, and its dividend payout ratio is 70%. Using the AFN equation, forecast the additional funds Beasley will need for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.$ The AFN equation assumes that ratios remain constant. However, firms are not always operating at full capacity so adjustments need to be made to the existing asset forecast. Excess capacity adjustments are changes made to the existing asset forecast because the firm is not operating at full capacity. For…arrow_forwardExcel Online Structured Activity: Dividend Policy Boehm Corporation has had stable earnings growth of 10% a year for the past 10 years, and in 2015 Boehm paid dividends of $3.4 million on net income of $12.5 million. However, in 2016 earnings are expected to jump to $17.5 million, and Boehm plans to invest $9.5 million in a plant expansion. This one- time unusual earnings growth won't be maintained, though, and after 2016 Boehm will return to its previous 10% earnings growth rate. Its target debt ratio is 35%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet a. Calculate Boehm's total dividends for 2016 under each of the following policies. Enter your answers in dollars. For example: $2.9 million should be entered as $2,900,000. Do not round intermediate calculations. Round your answers to the nearest dollar. 1. Its 2016 dividend payment is set to force dividends…arrow_forwardUsing the Value Line Investment Survey report in Exhibit 11.5, find the following information for Apple. What was the amount of revenues (i.e., sales) generated by the company in 2017? What were the latest annual dividends per share and dividend yield? What is the earnings per share (EPS) projection for 2019? How many shares of common stock were outstanding? What were the book value per share and EPS in 2017? How much long-term debt did the company have in the third quarter of 2018?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Fundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning
Fundamentals Of Financial Management, Concise Edi...
Finance
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Pfin (with Mindtap, 1 Term Printed Access Card) (...
Finance
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Cengage Learning
Dividend explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Wy7R-Gqfb6c;License: Standard Youtube License