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Question - Boehm Corporation has had stable earnings growth of 6% a year for the past 10 years, and in 2019 Boehm paid dividends of $6 million on net income of $15 million. However, net income is expected to grow by 30% in 2020r and Boehm plans to invest $10.0 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2020 Boehm will return to its previous 6% earnings growth rate. Its target debt ratio is 36%. Boehm has 1 million shares of stock.
a. Calculate Boehm's dividend per share for 2020 under each of the following policies:
1. Its 2020 dividend payment ls set to force dividends per share to grow at the long-run growth rate in earnings.
2. It continues the 2019 dividend payout ratio.
3. It uses a pure residual policy with all distributions in the form of dividends (36% of the $10.0 million investments 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 belng set according to the residual policy. What will the extra dividend be?
b. which of the preceding policies would you recommend?
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