The residual distribution policy approach to dividend policy is based on the theory that a firm's...
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The residual distribution 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 Purple Hedgehog Forestry Corporation: Purple Hedgehog Forestry Corporation has generated earnings of $240,000,000. 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. 79.25% O 71.33% What will Purple Hedgehog Forestry's dividend payout ratio be if it follows a residual distribution policy? O 63.40% O 47.55% 40% Debt 60% Equity 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 firm's annual dividend, assuming that all other factors are held constant? O Purple Hedgehog Forestry will pay a smaller annual dividend if it goes forward with this decision. O Purple Hedgehog Forestry's annual dividend will be greater if it goes forward with this decision. Yes No 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. Does this mean that the residual distribution policy approach can't be of any help to most firms? O Dividends O Earnings O Cash flow If you were to graph a firm's earnings, cash flows, and dividends over the past 20 years, which would you expect to be the most stable over time? The residual distribution 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 Purple Hedgehog Forestry Corporation: Purple Hedgehog Forestry Corporation has generated earnings of $240,000,000. 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. 79.25% O 71.33% What will Purple Hedgehog Forestry's dividend payout ratio be if it follows a residual distribution policy? O 63.40% O 47.55% 40% Debt 60% Equity 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 firm's annual dividend, assuming that all other factors are held constant? O Purple Hedgehog Forestry will pay a smaller annual dividend if it goes forward with this decision. O Purple Hedgehog Forestry's annual dividend will be greater if it goes forward with this decision. Yes No 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. Does this mean that the residual distribution policy approach can't be of any help to most firms? O Dividends O Earnings O Cash flow If you were to graph a firm's earnings, cash flows, and dividends over the past 20 years, which would you expect to be the most stable over time?
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Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
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