5. 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 Red Bison Petroleum Producers Group 40% Red Bison Petroleum Producers Group is expected to generate $200,000,000 in net income over the next year. Red Bison Petroleum Producers's stockholders expect it to maintain its long-run dividend payout ratio of 20% of earnings 60% 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 p reduces the amount of its forecasted capital budget, how will this affect the If Red Bison Petroleum Producers Grou 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 decrease O The amount that Red Bison Petroleum Producers will pay out in dividends this year will increase. a firm's earnings and dividends over the past 20 years, which would you expect to be the most If you were to graph stable over time? O The firm's earnings O The firm's dividends What kind of company is most likely to follow a strict residual dividend policy? O A firm whose investment needs change often O A firm with highly variable earnings and investment O Alli companies O A firm with stable, predictable earnings and investment Save & Continue FS F7 F9 F12 F3 5 6 8