Do dividends change every time earnings change

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Reference no: EM131316984

Do any of the four companies in Problem change dividends over the last five years? Do dividends change (in the same direction) every time earnings change? What does this say about a manager's expectations of changes in company earnings?

Problem
It is January 1, 2009. Boomer Equipment Company (BEC) currently has assets of $250 million and expects to earn a 10 percent return on assts during the year. There are 20 million shares of BEC stock outstanding. The firm has an opportunity to invest in a (minimally) positive-NPV project that will cost $25 million over the course of 2009.

BEC needs to determine whether it should finance this investment by retaining profits over the course of the year or pay the profits earned as dividends and issue new shares to finance the investments.

Show that the decision is irrelevant in a world of frictionless markets.

Reference no: EM131316984

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