6. The residual distribution model Aa Aa 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. is expected to generate $140 million in net income over the next year. Blime Inc.'s shareholders expect it to maintain its long-run dividend payout ratio of 20% of earnings. 40% Equity 60% Debt If the firm wants to maintain its current capital structure of 60% debt and 40% equity, what is the maximum capital budget it can support with this year's expected net income? Most firms have earnings that vary considerably from year to year and do not grow at a reliably constant pace Furthermore, their required investment may change often. Does this mean that the residual distribution policy approach can't be of ony help to most firms? O Yes O Type here to search