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FI516_Homework1_BrianLin - Brian Lin D01278742 Week 1...

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Brian Lin D01278742 Week 1 Homework Chapter 14 Question Problem 14-10 In 2010, the Keenan Company paid dividends totaling $3.6M on net income of $10.8M. The year was a normal one, and earnings have grown at a constant rate of 10% for the past 10 years. However, in 2011, earnings are expected to jump to $14.4M, and the firm expects to have profitable investment opportunities of $8.4M. It is predicted that Keenan will not be able to maintain the 2011 level of earnings growth – the high 2011 projected earnings level is due to an exceptionally profitable new product line to be introduced that year – and then the company will return to its previous 10% growth rate. Keenan’s target debt ratio is 40%. a. Calculate Keenan’s total dividends for 2011 if it follows each of the following policies: (1) It’s 2011 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Dividends 2010 = $3.6M Long Term Growth Rate = 10% Dividends 2011 = $3.6M * (1 + g) Dividends 2011 = $3.6M * (1 .1) Dividends 2011 = $3.96M (2) It continues the 2010 dividend payout ratio. Dividend Payout Ratio 2010 = 33.33% Net Income 2011 = $14.4M Target Equity Ratio (w s ) = 60% Capital Budget = $16.0M Req’d Equity = $9.60M Dividends Paid 2011 = $4.80M Dividend Payout Ratio 2011 = 33.33% (3) It uses a pure residual policy with all distributions in the form of dividends (40% of the $8.4M investment is financed with debt). Debt Ratio = 40% Equity Ratio = 60% Distributions = Net Income – [(Target Equity Ratio)(Total Capital Budget)] Distributions = $14.4M – [(60%)($8.4M)]
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Distributions = $9.36M (4)
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