3·The residual dividend model Aa Aa The residual dividend policy approach to div

Question

3·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 Purple Hedgehog Forestry Group: Purple Hedgehog Forestry Group has generated earnings of $180,000,000. 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 makes distributions in the form of dividends. 40% Debt 60% Equity What will Purple Hedgehog Forestry's dividend payout ratio be if it follows a residual dividend policy? O 57.86% o 65.10% O 54.25% Q 72.33% If Purple Hedgehog Forestry increases its debt ratio, then its dividend payout ratio will all other factors are held constant , assuming that If you were to graph a firm's earnings and dividends over the past 20 years, which would you expect to be the most stable over time? O The firm's earnings O The firm's dividends

Explanation / Answer

amount financed with equity = 0.6*83,000k = 49,800k

a. dividend payout ratio = 1 - 48,800/180,000 = 72.33%

b. if debt is increased the payout will also increase

c. dividends

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