Question

30% Equity 70% Debt Yellow Duck Distribution Inc. is expected to generate $140,000,000 in net income over the next year. Yellow Duck Distribution has forecasted a capital budget of $85,000,000, and it wishes to maintain its current capital structure of 70% debt and 30% equity. If the company follows a strict residual distribution policy and makes distributions in the form of dividends, what is its expected dividend payout ratio for this year? 81.79% 85.88% 57.25% 61.34% If Yellow Duck Distribution Inc. reduces the amount of its forecasted capital budget, how will this affect the firm's annual dividend, assuming that all other factors are held constant? The amount that Yellow Duck Distribution will pay out in dividends this year will increase. The amount that Yellow Duck Distribution will pay out in dividends this year will decrease. What kind of company is most likely to follow a strict residual distribution policy? O A firm with highly variable earnings and investment A firm with stable, predictable earnings and investment A firm whose investment needs change often A firm whose earnings are cyclical and follow the economy If you were to graph a firm's earnings, cash flows, and dividends over the past 20 years, which would you expect to be the most stable over time? Earnings Dividends Cash flow

Answer 1

Net Income	140,000,000
Total capital budget	85,000,000
By debt	85,000,000 * 70%= 59,500,000
By equity	85,000,000 * 30%= 25,500,000
Residual dividend	= Net income - Capital funding by equity
	= 140,000,000 - 25,500,000
Residual dividend	= 114,500,000
Question A
Dividend Payout ratio	= Residual dividend / Net Income
	= 114,500,000 / 140,000,000
Dividend Payout ratio	= 81 .79%
Question B
If yellow duck distribution Inc. reduces the amount of its forecasted capital budget,
The amount that yellow duck distribution will pay out in dividends this year will increase.
Question C
What kind of company is most likely to follow a strict residual distribution policy
A firm whose investments needs changes often
Question D
If you were to graph a firms earnings, cash flows and dividends over the past 20 years,
Earnings would be expected most stable over time