(1) Assume that ISI has a capital budget of $800,000 planned for next year. You have determined that your current capital structure (60 percent equity and 40 percent debt) is optimal, and your net income is forecast to be $600,000. Use the residual dividend policy approach to determine the total dollar dividend and the ISI payout ratio. In the process, explain what the residual dividend policy is and use a graph to illustrate your answer. Next, explain what would happen if net income were forecast at $400,000, or $800,000.

(2) Generally speaking, how would a change in investment opportunities affect the payout ratio under the residual payout policy?

(3) What are the advantages and disadvantages of residual policy? (Tip: don't neglect signage and customer effects.)

c.

What are some other commonly used dividend payment policies? What are its advantages and disadvantages? Which policy is most widely used in practice?

Answer rating: 100% (QA)

1 Residual Dividend Policy The residual dividend policy is an approach to determine the amount of dividends to be paid to shareholders after all acceptable investment opportunities have been funded Un... View the full answer