Q Search this Ch 14: Assignment - Distributions to Shareholders: Dividends and Share Repurchases 3. The residual dividend model The residual dividend 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 flem makes distributions based on the residual earnings Consider the case of Purple Hedgehog Forestry Group: Purple Hedgehog Forestry Group is expected to generate $180,000,000 in net income over the next year. Purple Hedgehog Forestry Group has forecasted a capital budget of $83,000,000, and it wishes to maintain its current capital structure of 70% debt and 30% equity 304 Equity 7098 Debt If the company follows a strict residual dividend policy and makes distributions in the form of dividends, what is its expected dividend payout ratio for this year? 77.55% 94.79% 60.32% 86.17% Purple Hedgehog Forestry Group 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 other factors are held constant? Purple Hedgehog Forestry Group's annual dividend will be greater if it goes forward with this decision Purple Hedgehog Forestry Group will pay a smaller annual dividend if it goes forward with this decision. 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. Which of these statements is the most accurate? O Most firms can still use the concepts behind a residual dividend policy to make long-run decisions about dividends. O A residual dividend policy can't be of any help to most firms