this question has been answered before and was wrong.Please attempt to answer co

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this question has been answered before and was wrong.Please attempt to answer correctly. Thanks

ABC Telecom Inc. is expected to generate $140 million in net income over the next year. ABC Telecom Inc.'s stockholders expect it to maintain its long-run dividend payout ratio of 25% of earnings. 40 Equity 60% Debt If the firm wants to maintain its current budget it can support with this year's expected net income? capital structure of 60% debt and 40% equity, what is the maximum capital If ABC Telecom Inc. increases its debt ratio, its dividend payout ratio willassuming that all other factors are held constant. increase decrease 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 thet the residual distibution policy approach can't be of any help to most firms? O Yes O No Gaven Industries, which is in the same sector as capital investment tends to be lumpy. This means that its required capital every few years, some sizable expenditures cause the firm's Industries be following a strict residual distribution policy? es, which is in the same sector as ABC Telecom Inc., has very stable, predictable earnings, but its spending is usually relatively low, but capital budget to be quite large. Should Ga ven O No Yes this is one question.Please attempt to answer all. Thanks

Explanation / Answer

ABC Telecom Inc Details Amt $Million Net Income                            140 million Dividend Payout ratio= 25% Dividend Payout Amt $= $                  35.00 million Retention Amt $= $               105.00 million So Retained Earning Available for Capital Expenditure after dividend payment=                          105 million Required D/E =6/4 So Total Capital Budget =105/40%=                          263 million If ABC increases the debt Ratio, the dividend Payout ratio will increase   assuming that all other factors are held constant as the required equity for Capital expenses will be lesser. For most firms having varying income levels and varying invetsments Residula Distribution Policy CAN BE of help. Each Year the residual dividend available will be decided after keeping aside the investment need for the next period from the net income. So the Residual distribution approach will work but target dividend payout ration may not be achieved. Gaven Industries should not follow residual distribution policy as it has sizable capital investment every few years and cannot follow the residual approach for the years having low capital expenditure requirement. It needs to carry forward more retained earning in low capital expenditure years for the years of high capital expenditure.   So dividend distribution is not ideal model for Gaven.

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