Blank 1 - 400,000,000 / 480,000,000 / 320,000,000 / 380,000,000

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: 40% Equity 60% Debt Purple Hedgehog Forestry Group is expected to generate $200,000,000 in net income over the next year. Purple Hedgehog Forestry's shareholders expect it to maintain its long-run dividend payout ratio of 20% of earnings. 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 If 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 decrease. O The amount that Purple Hedgehog Forestry will pay out in dividends this year will increase. 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 any help to most firms? Yes O NO If you were to graph a firm's earnings, cash flows, and dividends over the past 20 years, which would you expect to be the most stable over time? Cash flow Dividends Earnings