4. The residual dividend model The passive residual policy approsch 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 avallable to the firm, and the availability and cost of external capital. The firm makes distributions based on the residual earnings. Consider the case of Yeliew Duck Distribution Inc: Yeliow Duck Distribution Inci is expected to generate $140,000,000 in net income over the next year. Yeliow Duck Distribution's stocicholders expect it to maintain its long-run dividend payout ratio of 25% of earnings. If the firm wants to maintain its current capital structure of 60% debt and 40% equity, the maximum capital budget it can support with this year's expected net income is What kind of company is most likely to follow a strict passive residual policy? A firm with stable, precictable earnings and investment Al companies A firm whose earnings are crelical and folsow the economy A firm whose investment needs change often If the firm wants to maintain its current capital structure of 60% debt and 40% equity, the maximum capital budget it can support with this year's expected net income is What kind of company is most likely to follow a strict passive residual policy? A firm with stable, predictable earnings and investment All companies A firm whose earnings are cyclical and follow the economy A firm whose investment needs change often Gaven Industries, which is in the same sector as Yellow Duck Distribution, exhibits very stable and predictable eamings, but its capital investments tend to be lumpy. This means that Gaven's required capital investment spending is usually relatively low, but every few years, some sizable expenditures will cause the firm's capital budget to be quite large. Should Gaven Industries be following a strict passive residual policy? Yes No