The Residual Distribution Policy Approach To Dividend Policy Is Based On The Theory That A Firm S Optimal Dividend Distr 1 (27.47 KiB) Viewed 16 times
The residual distribution policy approach to dividend policy is based on the theory that a firm's optimal dividend distribution policy is a function of the firm's target capital structure, the investment opportunities available to the firm, and the availability and cost of external capital. The firm makes distributions based on the residual earnings. Consider the case of Purple Hedgehog Forestry Inc.: 30% Equity 70% Debt Purple Hedgehog Forestry Inc. is expected to generate $180,000,000 in net income over the next year. Purple Hedgehog Forestry has forecasted a capital budget of $86,000,000, and it wishes to maintain its current capital structure of 70% debt and 30% equity.
If the company follows a strict residual distribution policy and makes distributions in the form of dividends, what is its expected dividend payout ratio for this year? O 94.24% O 59.97% O 85.67% O 81.39% , assuming that all other factors are held If Purple Hedgehog Forestry increases its debt ratio, then its dividend payout ratio will constant. decrease Most firms have earnings that vary considerably from year to year and do not grow at increase nstant pace. Furthermore, their required investment may change often. Does this mean that the residual distribution policy approach can't be or any help to most firms? O Yes O No
Gaven Industries, which is in the same sector as Purple Hedgehog Forestry, exhibits very stable and predictable earnings, but its capital investments tend to be lumpy. This means that Gaven's required capital investment spending is usually relatively low, but every few years, some sizable expenditures will cause the firm's capital budget to be quite large. Should Gaven Industries be following a strict residual distribution policy? Yes O No OO
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