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 Yellow Duck Distribution Company: Yellow Duck Distribution Company is expected to generate \\( \\$ 240,000,000 \\) in net income over the next year. Yellow Duck Distribution's stockholders expect it to maintain its long-run dividend payout ratio of \25 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 Yellow Duck Distribution increases its debt ratio, then its dividend payout ratio will constant. , assuming that all other factors are held 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 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