Alternative dividend policies- long-run average return

Assignment Help Financial Management

Reference no: EM131552901

Alternative dividend policies

In 2015 the Keenan Company paid dividends totaling $2,400,000 on net income of $14 million. Note that 2015 was a normal year and for the past 10 years, earnings have grown at a constant rate of 6%. However, in 2016, earnings are expected to jump to $21 million and the firm expects to have profitable investment opportunities of $10.5 million. It is predicted that Keenan will not be able to maintain the 2016 level of earnings growth because the high 2016 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2016, the company will return to its previous 6% growth rate. Keenan's target capital structure is 40% debt and 60% equity.

a) Calculate Keenan's total dividends for 2016 assuming that it follows each of the following policies: (Write out your answers completely. For example, 25 million should be entered as 25,000,000.)

1) Its 2016 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.

2) It continues the 2015 dividend payout ratio.

3) It uses a pure residual dividend policy (40% of the $10.5 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.

Regular-dividend $

Extra dividend $

b.) Which of the preceding policies would you recommend?

Policy 1, 2, 3, or 4

c.) Assume that investors expect Keenan to pay total dividends of $9,000,000 in 2016 and to have the dividend grow at 6% after 2016. The stock's total market value is $240 million. What is the company's cost of equity? Round your answer to two decimal places. %

d.) What is Keenan's long-run average return on equity? [Hint: g = Retention rate x ROE = (1.0 - Payout rate)(ROE).] Do not round intermediate calculations. Round your answer to two decimal places. %

e.) Does a 2016 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?

Reference no: EM131552901

Questions Cloud

Long-run growth rate can firm be expected to maintain : what long-run growth rate can the firm be expected to maintain? If this plan is implemented, what must the firm's required return be?

What is the mass of the balloon without the gas : A spherical balloon with negligible elastic force is filled at room temperature (20 ?C with enough helium gas that it just floats in the surrounding air.

How do you make sure that data is accessible when needed : Give examples of data that you consider: Hot, and Cold. How do you make sure that data is accessible when needed? Where do you store each temperature of data?

What is the magnitude of the force : Suppose you have two point-like charges q1 = 0.5C and q2 = 1C separated by 0.5m. What is the magnitude of the force on the smaller of the two charges?

Alternative dividend policies- long-run average return : In 2015 the Keenan Company paid dividends totaling $2,400,000 on net income of $14 million. What is Keenan's long-run average return on equity?

Which dotted lines best approximates the behavior of helium : What is the average energy of a N2 molecule under these conditions? Express your answer in J as well as eV.

Provide example to support approach new business owners take : Assignment: Business Start-Up Budget Challenge- Provide examples to support the approach new business owners should take when developing a start-up budget.

How you would determine if the plan was finalised : Describe how you would determine if the plan was finalised. Explain your approach to gaining approval to commence the project.

Would communication barriers increase or decrease : Would communication barriers increase or decrease? How would the proposed solutions impact clients? Would it increase their engagement level?

User Account

All Pages