In 2005, Keenan Company paid dividends totaling $ 3,600,000 over a net profit of $ 10.8...

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In 2005, Keenan Company paid dividends totaling $ 3,600,000over a net profit of $ 10.8 million. It was a normal year and inthe last 10 years, profits grew at a constant rate of 10%. But in2006 it is expected to reach $ 14.4 million and that there areprofitable investment opportunities for $ 8.4 million. It isanticipated that Keenan will not be able to maintain that level ofgrowth - attributed to a new line of exceptionally profitableproducts that it introduced - and that the previous 10% growth ratewill resume. The optimal debt ratio is 40 percent.
to. Calculate the total dividends in 2006, if you observe thefollowing policies:
1) The 2006 dividend payment is established to make them growat the same rate as that of profits.
2) The payment reason for 2005 continues.
3) A pure residual policy is applied, with all distributionsthrough dividends (40% of the $ 8.4 million invested are financedwith debt).
4) A policy of regular dividends plus extras is applied, inwhich dividends are based on the long-term growth rate and theextras are set in accordance with the residual policy.
b. Which of the above policies would you recommend? Limit youroptions to those included here and substantiate yourresponse.
c. Does a dividend of $ 9,000,000 in 2006 seem reasonable inview of the responses to parts a and b? If not, should the dividendbe higher or lower?

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3.8 Ratings (461 Votes)

Kindly rate the answer 1 Dividend paid in 2005 3600000 Growth rate in dividend Growth rate of profits 10 Dividend payment for 2006 3600000 11 3960000 2 Dividend payout ratio in See Answer

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In 2005, Keenan Company paid dividends totaling $ 3,600,000over a net profit of $ 10.8 million. It was a normal year and inthe last 10 years, profits grew at a constant rate of 10%. But in2006 it is expected to reach $ 14.4 million and that there areprofitable investment opportunities for $ 8.4 million. It isanticipated that Keenan will not be able to maintain that level ofgrowth - attributed to a new line of exceptionally profitableproducts that it introduced - and that the previous 10% growth ratewill resume. The optimal debt ratio is 40 percent.to. Calculate the total dividends in 2006, if you observe thefollowing policies:1) The 2006 dividend payment is established to make them growat the same rate as that of profits.2) The payment reason for 2005 continues.3) A pure residual policy is applied, with all distributionsthrough dividends (40% of the $ 8.4 million invested are financedwith debt).4) A policy of regular dividends plus extras is applied, inwhich dividends are based on the long-term growth rate and theextras are set in accordance with the residual policy.b. Which of the above policies would you recommend? Limit youroptions to those included here and substantiate yourresponse.c. Does a dividend of $ 9,000,000 in 2006 seem reasonable inview of the responses to parts a and b? If not, should the dividendbe higher or lower?