Boehm Corporation has had stable earnings growth of 8% a year for the past 10 ye
ID: 2382591 • Letter: B
Question
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 onetime unusual earnings growth won’t be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%.
Calculate Boehm’s total dividends for 2014 under each of the following policies: 1. (a) Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. (b) It continues the 2013 dividend payout ratio.
Explanation / Answer
(a)
Total dividend for 2014 = Dividends for 2013*(1+Growth rate)
= $2.6 million*(1+8%)
= $2.808 million
(b)
Dividend payout ratio in 2013 = $2.6/$9.8
= 26.53%
dividend in 2014 will be $3.342 million ($12.6 million*26.53%)