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Fin Homework Set 5 Essay

3433 words - 14 pages

Running head: DIVIDENDS, CAPITAL STRUCTURES DECISIONS

Dividends, Capital Structures Decisions
Ma. Cesarlita G. Josol
MBA - Acquisitions
Strayer University

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DIVIDENDS, CAPITAL STRUCTURES DECISIONS

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Use the following information for Questions 1 through 3:
Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and
in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014
earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant
expansion. This one- time unusual earnings growth won’t be maintained, though, and after 2014
Boehm will return to its previous 8% earnings ...view middle of the document...

584 million) (26.5306 %)
= ($10.584 million) (0.265306)
Total Dividend Projected Income 2014 @ 8%) = $2.808 million or $2,808,000
Answer: Boehm’s total dividend for 2014 when earnings are set to grow at its long-run
growth rate is $2.808 million or $2,808,000
QUESTION # 2: Calculate Boehm’s total dividends for 2014 if it continues the 2013
dividend payout ratio.
The net income that is used is this case is the 2014 earnings with an expected jump to
$12.6 million.
Solution:
Dividend Total 2014 = (Net Income 2014) (Dividend/Income Ratio)
= ($12.6 million) (26.5306 %)
= ($12.6 million) (0.265306)
Dividend Total 2014 = $3.34 million
Answer: Boehm’s total dividend for 2014 if it continues the 2013 dividend payout ratio
Is $3.34 million.

DIVIDENDS, CAPITAL STRUCTURES DECISIONS
QUESTION # 3: It uses a pure residual policy with all distributions in the form of
dividends (35% of the $7.3 million investment is financed with debt).
Using the residual distribution policy:
Method 1:
Capital budget = $7.3 million
35% of the capital budget = 35% ($7.3 million) = $2.555
Total Dividend2014 = Net Income2014 – (Capital Budget2014 – $2.555million)
= $12.6 million – ($7.3 million - $2.555 million)
= $12.6 million - $4.745 million
Total Dividend for 2014 = $7.855 million
Method 2:
For a target debt ratio of 35%
Target equity ratio = 100% - 35%
= 65%
Total dividend 2014 = Net Income – (Target equity ratio) (Total capital budget)
= $12.6 million – (0.65) ($7.3 million)
= $12.6 million - $4.745million
Total dividend 2014 = $7.855 million
Answer: Boehm’s total dividend for 2014 when using a pure residual policy with all
distributions with 35% of target debt ratio of the capital budget is $7.855 million

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DIVIDENDS, CAPITAL STRUCTURES DECISIONS

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QUESTION # 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 policy.
a. Regular dividend based on the long-run growth rate:
Growth rate
Net Income
Dividend
Dividend/Net Income Ratio
Dividend/Net Income %

8%
2013
$9.8
$2.6
0.265306
26.5306%

2014
$10.584
$2.808

2014
$12.600
$3.34

Total Dividend = (Net Income2014) (Dividend Payout Ratio)
= ($10.584 million) (26.5306%)
= $2.808 million or $2,808,000
Total Dividend2014 = $2.808 million or $2,808,000
b. Extra dividend according to the residual policy
Target debt ratio = 35%
Target equity ratio = 100% - 35% = 65%
Extra dividend = Net Income2013 – (Target Equity Ratio) (Total Capital Budget)
= $9.8 million – (0.65) ($7.3 million)
= $9.8 million - $4.745
= $5.06 million
Answer:

a) Regular dividend = $2.808 million or $2,808,000
b) Extra dividend according to residual policy = $5.06 million

DIVIDENDS, CAPITAL STRUCTURES DECISIONS

6

Use the following information for Questions 5 and 6:
Schweser Satellites Inc. produces satellite earth stations that sell for...

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