One position expressed in the financial literature is that firms set their dividends as a residual after

Question:

One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investment.

a. Explain what a residual policy implies (assuming all distributions as dividends), illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.

b. Think back to Chapter 16, in which we considered the relationship between capital structure and the cost of capital. If the WACC-versus-debt-ratio plot was shaped like a sharp V, would this have a different implication for the importance of setting dividends according to the residual policy than if the plot was shaped like a shallow bowl (or a flattened U)?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...