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 Corporation: 30% Equity 70% Debt Purple Hedgehog Forestry Corporation is expected to generate $180,000,000 in net income over the next year. Die Hedged Forestry has forecasted a capital budget of $88,000,000, and it wishes to maintain its current capital structure of 70% debt and 30% equity If the company follows a strict residual distribution policy and makes distributions in the form of dividends, what is its expected dividend payout ratio for this year? 85.33% 64.00% 89.60% 81.06% If Purple Hedgehog Forestry increases its debt ratio, then its dividend payout ratio will assuming that all other factors are held constant. decrease Most firms have earnings that vary considerably from year to year and do not grow at increase instant pace. Furthermore, their required investment may change often. Does this mean that the residual distribution policy approach can't be ndip to most firma? 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 Earnings Dividends If Purple Hedgehog Forestry 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 relably 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 Earnings Dividends Grade It Now Save & Continue