The residual distribution policy approach to dividend policy is based on the the

Question

The residual distribution policy approach to dividend policy is based on the theory that a firm's 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 extermal capital. The firm makes distributions based on the residual earnings optimal dividend Consider the case of Purple Hedgehog Forestry Inc.: Purple Hedgehog Forestry Inc. has generated earnings of $200,000,000. Its target capital structure consists of 60% equity and 40% debt. It plans to spend $83,000,000 on capital projects over the next year and expects to finance this investment in the same proportion as its capital structure. The company makesDebt 60% Equity 40% distributions in the form of dividends. What will Purple Hedgehog Forestry's dividend payout ratio be if it follows a residual distribution policy? 63.84% 75.10% 45.06% 56.33% O If Purple Hedgehog Forestry increases its debt ratio, then its dividend payout ratio will assuming that all other factors are held constant. increase What kind of company is most likely to follow a strict residual distribution policy? O A firm whose earnings are cydical and follow the economy O A firm with stable, predictable earnings and investment O A firm with highly variable earnings and investment O All companies

Explanation / Answer

amount financed by equity = 0.60*83 mln

dividend payout ratio = 1 - 0.60*83/200 = 75.10%

b. increase

c. a firm with variable earnings and investment

d. yes

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