question archive The residual dividend policy approach is based on the theory that a company’s optimal distribution policy is a function of its target capital structure, the investment opportunities available to the firm, and the availability and cost of its external capital
The residual dividend policy approach is based on the theory that a company’s optimal distribution policy is a function of its target capital structure, the investment opportunities available to the firm, and the availability and cost of its external capital
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The residual dividend policy approach is based on the theory that a company’s optimal distribution policy is a function of its target capital structure, the investment opportunities available to the firm, and the availability and cost of its external capital. The firm makes distributions to its shareholders based on its residual earnings.
Consider the following example:
ABC Telecomm Inc. has generated earnings of $1,800,000. Its target capital structure consists of 60% equity and 40% debt. It plans to spend $86,000 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.
ABC Telecomm’s dividend payout ratio will be 1.) __________ if it follows a residual dividend policy.
a. 82.56%
b. 92.27%
c. 97.13%
d. 101.99%
Option 1
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