fservletquizctxream0057quiz actiohtakeQuizquiz probGuidQNAPC

f/servlet/quiz?ctx-ream-0057&quiz; actioh-takeQuiz&quiz; probGuid-QNAPCOA8010100000041ebc6100500008tck-m 153135 Distributions to Shareholders- Dividends and Share Repurchases Graded Assignment | Read Chapter 14 Back to Assignment Due Thursday 08.02.18 at 11:45 PM Attempts: Keep the Highest: 3 Aa Aa 2. 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 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 30% of earnings. 60% Debt 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 all other factors are held constant assuming that e Marmot Manufacturing Group has very stable, predictable earnings, but its capital investment tends to be y. That means that its required capital budget usually is relatively low, but every few years some large follow a expenditures cause the firm\'s capital budget to be quite large. Orange Marmot Manufacturing strict residual dividend policy F9 F10 F11 F12 F7 F8 F5 F6 41 8 6 7 8 5

Solution

Earnings = 240 million
Dividends = 0.30*240=72 million
Left for projects = 168

hence 40%=168
Total or 100%=$420 MILLION OR $420,000,000

If debt ratio increases, equity shall be less, dividend payout shall increase

should follow a residual policy