Purple Hedgehog Forestry is considering using more equity and less debt in its capital structure. Which of these statements best describes how this will affect the firms annual dividend, assuming that all other factors are held constant?

• Purple Hedgehog Forestrys annual dividend will be greater if it goes forward with this decision.
• Purple Hedgehog Forestry will pay a smaller annual dividend if it goes forward with this decision.

What kind of company is most likely to follow a strict residual distribution policy?

• A firm whose earnings are cyclical and follow the economy
• A firm with highly variable earnings and investment
• A firm whose investment needs change often
• A firm with stable, predictable earnings and investment

If you were to graph a firms earnings, cash flows, and dividends over the past 20 years, which would you expect to be the most stable over time?

• Cash flow
• Dividends
• Earnings