6. The residual dividend model The residuai distribution poicy 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 extemal capital. The firm makes distributions based on the residual eamings. Consider the case of Red Bison Petroleum Producers Inc. Red Bison Petroleum Producers Inc. has generated eamings of $180,000,000. Its target capital structure consists of 60% equity and 40% debt. It plans to spend 83,000,000 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. 0% Debt 60% Equity What will Red Bison Petroleum Producers's dividend payout ratio be if it follows a residual distribution policy? 65.10% 43.40% 54.25% 72.33% Red Bison Petroleum Producers is considering using more equity and less debt in its capital structure. which of these statements best describes how this will affect the firm's annual dividend, assuming that all ather factors are held constant? O Red Bison Petroleum Producers's annual dividend will be greater if it goes forward with this decision. O Red Bison Petroleum Producers will pay a smaller annual dividend if it goes forward with this decision. Most firms have eamings 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 cant be ofany help to most firms? es O No Gaven Industries, which is in the same sector as Red Bison Petroleum Producers, 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 residual distribution policy? es O No