5. The residual dividend model

The residual dividend policy approach to dividend policy is based on the theory that a firms optimal dividend distribution policy is a function of the firms 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.

Yellow Duck Distribution Company is expected to generate $200,000,000 in net income over the next year. Yellow Duck Distribution has forecasted a capital budget of $88,000,000, and it wishes to maintain its current capital structure of 70% debt and 30% equity.

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?

86.80%

69.44%

78.12%

82.46%