Strayer University, Washington - FIN \ 534Fin534Week10LastHomework ( 100% CORRECT SOLUTIONS )

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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 expe... cted 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. 2. (a) 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). Used residual distr. (b) It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the longrun growth rate and the extra dividend being set according to the residual policy. 3. What is the incremental profit? To get a rough idea of the project’s profitability, what is the project’s expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not? 4. Would the firm’s break-even point increase or decrease if it made the change? [Show More]

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