09 May WHAT IS KEENAN’S LONG-RUN AVERAGE RETURN ON EQUITY?
Alternative Dividend Policies In 2013 Keenan Company paid dividends totaling $3 600 000 on net income of $10.8 million. Note that 2013 was a normal year and that for the past 10 years earnings have grown at a constant rate of 10%. However in 2014 earnings are expected to jump to $14.4 million and the firm expects to have profitable investment opportunities of $8.4 million. It is predicted that Keenan will not be able to maintain the 2014 level of earnings growth because the high 2014 earnings level is attributable to an exceptionally profitable new products line introduced that year. After 2014 the company will return to its previous 10% growth rate. Keenan’s target capital structure is 40% debt and 60% equity.d. What is Keenan’s long-run average return on equity? [Hint: g= Retention rate x ROE = (1.0 – payout( (ROE).]
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