ONAPCOA8010100000041ebc6 10050000&ctxeream-0057;&ckem; 1533240040980 0AAA6804016
ID: 2658239 • Letter: O
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ONAPCOA8010100000041ebc6 10050000&ctxeream-0057;&ckem; 1533240040980 0AAA6804016417ADEF006C3200 Attempts: Keep the Highest: /3 2. The residual dividend model Aa Aa The residual dividend policy approach to dividend policy is based on the theory that a firm's optimal d distribution polioy 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 Yellow Duck Distribution Corporation Yellow Duck Distribution Corporation is expected to generate $140,000,000 in net income over the next year. Yellow Duck Distribution's stockholders expect it to maintain its long-run dividend payout ratio of 40% of earnings. 40% Equity 60% Debt If the firm wants to maintain its current capital structure of 60% debt and 40% equity, the maximum capital budget it can support with this year's expected net income is If Yellow Duck Distribution Corporation 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 Yellow Duck Distribution will pay out in dividends this year will increase. The amount that Yellow Duck Distribution will pay out in dividends this year will decrease. Orange Marmot Manufacturing Inc. has very stable, predictable earnings, but its capital investment tends to be lumpy. That means that its required capital budget usually is relatively low, but every few years some large expenditures cause the firm's capital budget to be quite large. Orange Marmot Manufacturing strict residual dividend policy follow a Flash Player WIN 2 3 3 34.1 2004-2016 Apla All rights reserved 2033 cengage Learming except as noted Al rights reserved Continse without savingExplanation / Answer
1.
Maximum capital budget that can be supported = Net income * Equity proportion in capital structure = $140,000,000 * 40% = $56,000,000
2.
If the amount of forecasted capital budget is decreased, the annual dividend shall increase. Decreasing capital budget will lead to less apportionment of net income for capital budget and more residual dividends.
3.
Should not
Inconsistent and uneven capital expenditure shall lead to inconsistent dividends every year.
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