The residual dividend policy approach is based on the theory that a companys optimal distribution...
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The residual dividend policy approach is based on the theory that a companys 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:
Globex Corporation is expected to generate $2,200,000 in net income over the next year. Globex Corporation has forecasted a capital budget of $89,000, and it wishes to maintain its current capital structure of 70% debt and 30% equity.
If Globex follows a strict residual dividend policy and makes distributions to its shareholders in the form of dividends, its expected dividend payout ratio for this year will be __________________ (74.09%, 88.91%, 98.79%,103.73%)
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