3. 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 eanings. Consider the case of Red Bison Petroleum Producers Company: Red Bison Petroleum Producers Company is expected to generate $180,000,000 in net income over the next year. Red Bison Petroleum Producers has forecasted a capital budget of $88,000, 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? O O 85.33% 68.26% 59.73% 72.53% If Red Bison Petroleum Producers Company 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 Red Bison Petroleum Producers will pay out in dividends this year will increase. O The amount that Red Bison Petroleum Producers will pay out in dividends this year will decrease. Blue Guppie Seafood Group has very stable, predictable eamings, 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. Blue Guppie Seafood policy follow a strict residual dividend