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 Purple Hedgehog Forestry Corporation: Purple Hedgehog Forestry Corporation is expected to generate $180,000,000 in net income over the next year. Purple Hedgehog Forestry 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? 81.86% 86.17% 73.25% 77.55% If Purple Hedgehog Forestry 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? The amount that Purple Hedgehog Forestry will pay out in dividends this year will decrease O The amount that Purple Hedgehog Forestry will pay out in dividends this year will increase. Most firms have earnings that vary considerably from year to year and do not grow at a reliably constant pace Furthermore, their required investment may change often. Which of these statements is the most accurate? O Most firms can still use the concepts behind a residual dividend policy to make long-run decisions about dividends O A residual dividend policy can't be of any help to most firms