Residual Dividend Model

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 years expected net income is__________________ .

If Yellow Duck Distribution Group reduces the amount of its forecasted capital budget, how will this affect the firms annual dividend, assuming that all other factors are held constant?

A.) The amount that Yellow Duck Distribution will pay out in dividends this year will increase.

B.) The amount that Yellow Duck Distribution will pay out in dividends this year will decrease.

What kind of company is most likely to follow a strict residual distribution policy?

A.) A firm whose earnings are cyclical and follow the economy

B.) A firm whose investment needs change often

C.) All companies

D.) A firm with stable, predictable earnings and investment

Gaven Industries, which is in the same sector as Yellow Duck Distribution, exhibits very stable and predictable earnings, but its capital investments tend to be lumpy. This means that Gavens required capital investment spending is usually relatively low, but every few years, some sizable expenditures will cause the firms capital budget to be quite large. Should Gaven Industries be following a strict residual distribution policy?

A.)Yes

B.) No

Consider the case of Yellow Duck Distribution Group: 40% Equity 60% Debt Yellow Duck Distribution Group is expected to generate $180,000,000 in net income over the next year. Yellow Duck Distribution's stockholders expect it to maintain its long-run dividend payout ratio of 40% of earnings