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 Purple Hedgehog Forestry Group: Purple Hedgehog Forestry Group has generated earnings of $140,000,000. Its target capital structure consists of 60% equity and 40% debt. It plans to spend $85,000,000 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. What will Purple Hedgehog Forestry Group's dividend payout ratio be if it follows a residual dividend policy? O 63.57%
O 69.93%
O 57.21%
O 60.39%
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If Purple Hedgehog Forestry Group reduces the amount of its forecasted capital budget, how will this affect the firm's annual dividend, assuming that all other factors are held constant?
O The amount that Purple Hedgehog Forestry Group will pay out in dividends this year will decrease. O The amount that Purple Hedgehog Forestry Group will pay out in dividends this year will increase. If you were to graph a firm's earnings and dividends over the past 20 years, which would you expect to be the most stable over time? O The firm's earnings O The firm's dividends