Bundle: Fundamentals Of Financial Management, Loose-leaf Version, 15th + Mindtapv2.0 Finance, 1 Term (6 Months) Printed Access Card
15th Edition
ISBN: 9780357307731
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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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?
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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…
Chapter 15 Solutions
Bundle: Fundamentals Of Financial Management, Loose-leaf Version, 15th + Mindtapv2.0 Finance, 1 Term (6 Months) Printed Access Card
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