P$133$ Residual dividend policy As president of Young$$s of California, a large clothing

chain, you have just received a letter from a major stockholder. The stockholder

asks about the company$$s dividend policy. In fact, the stockholder has asked you to

estimate the amount of the dividend that you are likely to pay next year. You have

not yet collected all the information about the expected dividend payment, but you

do know the following:

$(1)$ The company follows a residual dividend policy.

$(2)$ The total capital budget for next year is likely to be one of three amounts,

depending on the results of capital budgeting studies that are currently under

way. The capital expenditure amounts are $$2$ million, $$3$ million, and $$4$ million.

$(3)$ The forecasted level of potential retained earnings next year is $$2$ million.

$(4)$ The target or optimal capital structure is a debt ratio of $40\%.$

You have decided to respond by sending the stockholder the best information available to you.

a$.$ Describe a residual dividend policy.

b$.$ Compute the amount of the dividend $($or the amount of new common stock

needed$)$ and the dividend payout ratio for each of the three capital expenditure

amounts.

c$.$ Compare, contrast, and discuss the amount of dividends $($calculated in part b$)$

associated with each of the three capital expenditure amounts.