Question

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 Red Bison Petroleum Producers Corporation: Red Bison Petroleum Producers Corporation is expected to generate $140,000,000 in net income over the next year. Red Bison Petroleum Producers has forecasted a capital budget of $83,000,000, and it wishes to maintain its current capital structure of 70% debt and 30% equity. 30% Equity 70% Debt If the company follows a strict residual dividend policy and makes distributions in the form of dividends, what is its expected dividend payout ratio for this year? O 65.77% 78.10% O 73.99% 82.21% assuming If Red Bison Petroleum Producers increases its debt ratio, then its dividend payout ratio will that all other factors are held constant. 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? The firm's earnings The firm's dividends

Answer 1

rate positively .. let me know if you need any clarification..

Ans 1
i	Net income =			140000000
ii	Capital budgeting required =			83000000
iii=ii*30%	Equity share of capital project =			24900000
iv=i-iii	Dividend payout			115100000
v=iv/i	Dividend payout ratio			82.21%
	Ans =			82.21%
ans 2	Dividend payout ratio will INCREASE assuming that all other factor are held constant
ans 3	correct answer is option: The firm's earning