(1) Assume that ISI has a capital budget of $800,000 planned for next year. You have determined that your current capital structure (60 percent equity and 40 percent debt) is optimal, and your net income is forecast to be $600,000. Use the residual dividend policy approach to determine the total dollar dividend and the ISI payout ratio. In the process, explain what the residual dividend policy is and use a graph to illustrate your answer. Next, explain what would happen if net income were forecast at $400,000, or $800,000.

(2) Generally speaking, how would a change in investment opportunities affect the payout ratio under the residual payout policy?

(3) What are the advantages and disadvantages of residual policy? (Tip: don't neglect signage and customer effects.)

c.

What are some other commonly used dividend payment policies? What are its advantages and disadvantages? Which policy is most widely used in practice?