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# Fin Homework Set 5

Submitted By seillihcd
Words 3433
Pages 14
Running head: DIVIDENDS, CAPITAL STRUCTURES DECISIONS

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

1

DIVIDENDS, CAPITAL STRUCTURES DECISIONS

2

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 growth rate. Its target debt ratio is 35%.
Calculate Boehm’s total dividends for 2014 under each of the following policies:
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

QUESTION #1: Calculate Boehm’s total dividends for 2014 if its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.
Step 1: Find the dividend / net income ratio for 2013
Dividend/ Net Income Ratio = Dividend 2013 / Net Income2013
= \$2.6 million / \$9.8 million
= 0.265306
Dividend/Net Income Ratio = 26.5306 %
**The dividend/net income ratio will be used as the rate for the projection of dividends
Step 2: Calculate the 2014 projected net income using the long-run growth rate for Boehm, which is at 8%.
Net Income Projected 2014 @ 8% = Net Income 2013 + (Net Income2013) (Growth Rate)
= \$9.8 million + (\$9.8 million) (0.08)

DIVIDENDS, CAPITAL STRUCTURES DECISIONS

3

Net Income Net Income Projected 2014 @ 8% = \$10.584 million
Step 3: Compute for the total dividend when earnings for 2014 is calculated using the 8%
growth...

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