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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
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 Yellow Duck Distribution Company: Yellow Duck Distribution Company has generated earnings of $140,000,000. Its target capital structure consists of 60% equity and 40% debt. It plans to spend $85,000,000 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 60% 40% Equity Debt What will Yellow Duck Distribution's dividend payout ratio be if it follows a residual dividend policy? O O O 54.04% 38.14% 63.57% 57.21%
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