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 firm makes

distributions based on the residual earnings.

Consider the case of Yellow Duck Distribution Company:

Yellow Duck Distribution Company has generated earnings of $$200,000,000.$ Its target

capital structure consists of $60\%$ equity and $40\%$ debt. It plans to spend $$83,000,000$ on

capital projects over the next year and expects to finance this investment in the same

proportion as its capital structure. The company makes distributions in the form of

dividends.

What will Yellow Duck Distribution Company's dividend payout ratio be if it follows a residual dividend policy?

$45\mathrm{.}06\%$

$75\mathrm{.}10\%$

$71\mathrm{.}34\%$

$63\mathrm{.}83\%$

If Yellow Duck Distribution Company reduces the amount of its forecasted capital budget, how will this affect the firm's annual dividend, assuming that

all other factors are held constant?

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

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

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?

A residual dividend policy can't be of any help to most firms.

Most firms can still use the concepts behind a residual dividend policy to make long$-$run decisions about dividends.