4. The residual dividend model Aa Aa The residual dividend policy approach to di

Question

4. The residual dividend model Aa Aa The residual dividend 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 Yellow Duck Distribution Corporation Yellow Duck Distribution Corporation is expected to generate $140,000,000 in net income over the next year. Yellow Duck Distribution has forecasted a capital budget of $83,000,000, and it wishes to maintain its current capital structure of 70% debt and 30% equity 30% Equity 70% Debt If the company follows a strict residual dividend policy and makes distributions in the form of dividends, what is its expected dividend payout ratio for this year? 82.21% 69.88% 73.99% 61.66% O O If Yellow Duck Distribution Corporation reduces the amount of its forecasted capital budget, how will this affect the firm's annual dividend, assuming that all other factors are held constant? O The amount that Yellow Duck Distribution will pay out in dividends this year will decrease O The amount that Yellow Duck Distribution will pay out in dividends this year will increase Orange Marmot Manufacturing Inc. has very stable, predictable earnings, but its capital investment tends to be lumpy. That means that its required capital budget usually is relatively low, but every few years some large expenditures cause the firm's capital budget to be quite large. Orange Marmot Manufacturing strict residual dividend policy follow a should not should

Explanation / Answer

Hence first option is correct

The amount of dividend paid will increase as there will be less cash flow to capital budget

should not follow a strict dividend policy

Capital budget 83 Equity 24.9 NI 140 Dividend 115.1 Payout ratio 0.822143

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