increase/decrease

The residual distribution 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 Company: 40% Debt 60% Equity Red Bison Petroleum Producers Company has generated earnings of $140,000,000. Its target capital structure consists of 60% equity and 40% debt. It plans to spend $83,000,000 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 Red Bison Petroleum Producers's dividend payout ratio be if it follows a residual distribution policy? 70.87% 67.65% 57.99% 64.43% If Red Bison Petroleum Producers increases its debt ratio, then its dividend payout ratio will , assuming that all other factors are held constant. 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 that the residual distribution policy approach can't be of any help to most firms? Yes No Gaven Industries, which is in the same sector as Red Bison Petroleum Producers, exhibits very stable and predictable earnings, but its capital investments tend to be lumpy. This means that Gaven's required capital investment spending is usually relatively low, but every few years, some sizable expenditures will cause the firm's capital budget to be quite large. Should Gaven Industries be following a strict residual distribution policy? Yes o No