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DVU Residual Dividend Policy Questions

DVU Residual Dividend Policy Questions


1. Puckett Products is planning for $4 million in capital expenditures next year. Puckett’s target capital structure consists of 45% debt and 55% equity. If net income next year is $3 million and Puckett follows a residual distribution policy with all distributions as dividends, what will be its dividend payout ratio? Round your answer to two decimal places.

2. Petersen Company has a capital budget of $1.3 million. The company wants to maintain a target capital structure that is 65% debt and 35% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual distribution model and pays all distributions as dividends, what will be its payout ratio? Round your answer to two decimal places.

3. The Wei Corporation expects next year’s net income to be $20 million. The firm is currently financed with 50% debt. Wei has $14 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual distribution model (assuming all payments are in the form of dividends), how large should Wei’s dividend payout ratio be next year? Round your answer to two decimal places.

4.Suppose you own 5,000 common shares of Laurence Incorporated. The EPS is $9.00, the DPS is $5.00, and the stock sells for $80 per share. Laurence announces a 2-for-1 split. Immediately after the split, how many shares will you have? Round your answer to the nearest whole number.


What will the adjusted EPS and DPS be? Round your answers to the nearest cent.

EPS: $

DPS: $

What would you expect the stock price to be? Round your answer to the nearest cent.

5. Harris Company must set its investment and dividend policies for the coming year. It has three independent projects from which to choose, each of which requires a $4 million investment. These projects have different levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are as follows:

Project A: Cost of capital = 15%; IRR = 17%
Project B: Cost of capital = 13%; IRR = 11%
Project C: Cost of capital = 6%; IRR = 10%

Harris intends to maintain its 50% debt and 50% common equity capital structure, and its net income is expected to be $5,000,000. If Harris maintains its residual dividend policy (with all distributions in the form of dividends), what will its payout ratio be? Round your answer to two decimal places.

6. Boehm Corporation has had stable earnings growth of 9% a year for the past 10 years, and in 2019 Boehm paid dividends of $3 million on net income of $15 million. However, net income is expected to grow by 34% in 2020, and Boehm plans to invest $10.5 million in a plant expansion. This one-time unusual earnings growth won’t be maintained, though, and after 2020 Boehm will return to its previous 9% earnings growth rate. Its target debt ratio is 32%. Boehm has 1 million shares of stock.

  1. Calculate Boehm’s dividend per share for 2020 under each of the following policies:
    1. Its 2020 dividend payment is set to force dividends per share to grow at the long-run growth rate in earnings. Round your answer to the nearest cent.$
    2. It continues the 2019 dividend payout ratio. Round your answer to the nearest cent.$
    3. It uses a pure residual policy with all distributions in the form of dividends (32% of the $10.5 million investment is financed with debt). Round your answer to the nearest cent.$
    4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy. What will the extra dividend be? Round your answer to the nearest cent.$
  2. Which of the preceding policies would you recommend?

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