In 2007 M Corporation paid dividends totaling$3 m

In 2007,M Corporation paid dividends totaling$3 million on net income of$15 million. 2007 was a normal year,and for the past five years,earnings have grown at a constant rate of 10 percent. However,earnings are expected to jump to$18 million in 2008,and the firm expects to have$12 million investment opportunities in 2009. It is predicted that M will not be able to maintain the 2008 level of earnings growth in the future——the high 2008 earnings level is attributable to an exceptionally profitable new product line introduced in that year—and the company will return to its previous 10 percent growth rate. M’s target debt ratio is 40 percent in 2007,which will be continued in the future.

Requirment：

Calculate M’s expected dividends for 2008 if it follows each of the following policies:

A.Its 2008 dividend payment is set to make dividends grow at the long-run growth rate in earnings.

B.It continues the 2007 dividend payout ratio.

C.It uses a residual policy with all distributions in the form of dividends.

D.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 (Indicate the regular dividend and the extra dividend separately).

Answer:

A. Continuing growth dividend policy:

3*(1+10%) =$3.3 million

B.Constant payout ratio dividend policy:

18*3/15=$3.6 million

C.Residual dividend policy:

18 -12*(1- 40%) =$10.8 million

D. Regular - dividend - plus - plus - extra policy:

Regular dividend=3*(1+10%) =$3.3million

Extra dividend=10.8-3.3=$7.5 million