In 2012 the Keenan Company paid dividends totalling $850,000 on net income of $4.25 million. 2012 was

Question:

In 2012 the Keenan Company paid dividends totalling $850,000 on net income of $4.25 million. 2012 was a normal year, and for the past 10 years, earnings have grown at a constant rate of 6%. However, in 2013, earnings are expected to jump to $5.3 million, and the firm expects to have profitable investment opportunities of $3.8 million. It is predicted that Keenan will not be able to maintain the 2013 level of earnings growth-the high 2013 earnings level is attributable to an exceptionally profitable new product line introduced that year-and the company will return to its previous 6% growth rate. Keenan's target debt ratio is 40%.
a. Calculate Keenan's total dividends for 2013 if it follows each of the following policies:
(1) Its 2013 payment is set to force dividends to grow at the long-run growth rate in earnings.
(2) It continues the 2012 payout ratio.
(3) It uses a pure residual policy with all distributions in the form of dividends.
(4) It employs a regular-dividend-plus-extras policy, with the regular being based on the long-run growth rate and the extra being set according to the residual policy.
b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed, but justify your answer? Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...