6. The residual dividend model The residual distribution 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 Purple Hedgehog Forestry Group: 30% Equity 70% Debt Purple Hedgehog Forestry Group is expected to generate $140,000,000 in net income over the next year. Purple Hedgehog Forestry has forecasted a capital budget of $88,000,000, and it wishes to maintain its current capital structure of 70% debt and 30% guity If the company follows a strict residual distribution policy and makes distributions in the form of dividends, what is its expected dividend payout ratio for this year? 85.20% O 81.14% 64.01% O 81.14% O 64.9156 O 73.03% of Purple Hedgehog Forestry Group reduces the amount of its forecasted capital budget, how will this affect the firm's annual dividend, assuming that all other factors are held constant? The amount that Purple Hedgehog Forestry will pay out in dividends this year will increase The amount that Purple Hedgehog Forestry will pay out in dividends this year wil decrease 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 polley scoroach can't be of any help to most fema? O Yes NO Gaven Industries, which is in the same sector as Purple Hedgehog forestry exhibits very stable and predictable amings, but its capital investment tend to be lumpy. This means that Gaven's required capital investment spending is usually relatively low, but every few years, some expenditures will cause the firm's capital budget to be quite large. Should Gaven Industries be following world residual dibution policy O Yes O NO