1. The residual dividend model 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: 30% Equity Purple Hedgehog Forestry Group is expected to generate $240,000,000 in net income over the next year. Purple Hedgehog Forestry Group has forecasted a capital budget of $83,000,000, and it wishes to maintain its current capital structure of 70% debt and 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? 89.63% 94.11% 98.59% 85.15% If Purple Hedgehog Forestry Group 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? The amount that Purple Hedgehog Forestry Group will pay out in dividends this year will decrease. The amount that Purple Hedgehog Forestry Group will pay out in dividends this year will increase. 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? The firm's earnings The firm's dividends