5. The residual distribution model The residual distribution policy approach is based on the theory that a firm's optimal distribution policy is a function of the firm's target capital structure, the investment opportunities that the firm has, and the availability and cost of external capital. The firm makes distributions based on the residual earnings. Consider the following example: Blime Inc. has generated earnings of $240 million. Its target capital structure consists of 60% equity and 40% debt. It plans to spend $88 million 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. What will Blime Inc.'s dividend payout ratio be if it follows a residual distribution policy? quite large. Should Gaven Industries be following a strict residual distributions policy? Yes No