Residual Dividend Policy

Good Essays
WEB APPENDIX 15A
An Example: The Residual Dividend Model

In the chapter we discussed the problem with strict adherence to the dividend residual model. In practice, companies use the residual dividend model to develop an understanding of the determinants of an optimal dividend policy, but they typically use a computerized financial forecasting model when setting the target payout ratio. Most larger corporations forecast financial statements over some horizon (usually 5 to 10 years). Projected capital expenditures and working capital requirements are entered into the model, along with sales forecasts, profit margins, depreciation, and the other elements required to forecast cash flows. The target capital structure is also specified, and the model shows the amount of debt and equity that will be required to meet the capital budgeting requirements while maintaining the firm’s target capital structure. From all these data, the funds available for shareholder distribution can be determined. Table 15A-1 illustrates how Langdon Trading Inc. combines the forecasting model and the residual dividend model to determine its

TA B L E 1 5 A - 1

Long-Run Residual Dividend Model Forecast

15A-1

15A-2

Web Appendix 15A An Example: The Residual Dividend Model

payout policy. This spreadsheet is provided in the model developed for this chapter—just click on the tab labeled Web Appendix 15A. Langdon’s analysts have made the assumptions shown and estimated the firm’s expected earnings and required assets over the next five years. In Langdon’s case, the required new investment represents the capital the firm must invest to fund its future capital budget. The firm expects its assets, in general, to grow at 12 percent, which its initial forecast reflected. In a subsequent forecast, Langdon recognized a very large expenditure needed in the third year so it added this investment ($200 million) to the Year 3 total assets. Hence, the investment in Year 3 is far greater than

You May Also Find These Documents Helpful

  • Satisfactory Essays

    Residual Dividends

    • 513 Words
    • 3 Pages

    Chapter 14. Residual Dividends Residual Dividend -2011 Net Income $15.0 Million -2012 Net Income increase by 8% -Capital structure 35% Debt, 65% Equity -2011 paid $3.0 million cash dividends -2012 invest a major capital project; capital budget for the project is $12.0 million 1. Cash dividends 2012: 3,000,000 x (1+0.08) = 3,000,000 x 1.08 = 3,240,000 payout in 2012 2. Dividend Payout ratio 2012 (8%):…

    • 513 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    Dividend Policies

    • 2067 Words
    • 9 Pages

    The dividend irrelevance theory is a concept that is based on the premise that the dividend policy of a given company should not be considered particularly important by investors. Further, the terms of that dividend policy should not have any bearing on the price of the shares of stock issued by that company. With this particular financial theory, the idea is that investors can always sell a portion of their shares if they want to generate some amount of cash flow. As with most investment theories…

    • 2067 Words
    • 9 Pages
    Powerful Essays
  • Powerful Essays

    Dividend Policy

    • 1691 Words
    • 7 Pages

    Dividend policy Dividend policy is concerned with taking a decision regarding paying cash dividend in the present or paying an increased dividend at a later stage. The firm could also pay in the form of stock dividends which unlike cash dividends do not provide liquidity to the investors, however, it ensures capital gains to the stockholders. The expectations of dividends by shareholders helps them determine the share value, therefore, dividend policy is a significant decision taken by the financial…

    • 1691 Words
    • 7 Pages
    Powerful Essays
  • Better Essays

    Running Head: DIVIDENDS AND DIVIDEND POLICY: DOES DIVIDEND Dividends and Dividend Policy: Does Dividend Policy Matter Ronald Jones University of Phoenix August 21, 2011 Dividends and Dividend Policy: Does Dividend Policy Matter According to Investor Dictionary, corporate finance is the specific area of finance dealing with the financial decisions corporations make, and the tools and analysis used to make the decisions. It may be divided as a whole between long term, capital…

    • 1197 Words
    • 4 Pages
    Better Essays
  • Satisfactory Essays

    residual div policy

    • 317 Words
    • 2 Pages

    $675,000,000 - $90,000,000 = $585,000,000 c) Suppose the firm uses residual policy. Planned capital expenditures total $45,000,000. Based on this information, what will the dividend per share be? The correct answer was: $4.20 share D/E = 6.50 implies capital structure is (2/15) equity and (13/15) debt Equity portion of investment plan = (2/15) × $45,000,000 = $6,000,000. Residual = $90,000,000 - $6,000,000 = $84,000,000 Dividend per share = $84,000,000/20,000,000 share(s) = $4.20 per share d)…

    • 317 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Dividend Policy

    • 1959 Words
    • 7 Pages

    Dividend Theory 1. Discuss the factors which may impact on a firm’s dividend policy? .Industry and Company Variations Payout ratios vary amongst different industries e.g. firms within the telecoms and utilities sectors may typically payout around 60% of earnings in dividends, whilst retailers and computer software companies may typically payout around 20% of earnings in dividends Legal Constraints 1. Legal constraints can be viewed in the context of three broad areas;…

    • 1959 Words
    • 7 Pages
    Powerful Essays
  • Best Essays

    Dividend Policy

    • 4729 Words
    • 19 Pages

    THE EFFECT OF DIVIDEND POLICY ON THE MARKET PRICE OF SHARES IN NIGERIA: CASE STUDY OF FIFTEEN QUOTED COMPANIES By Dr. J. J. Adefila Department of Accountancy, University of Maiduguri, Dr. J. A. Oladipo and J.O Adeoti, Both of the Department of Business Administration, University of Ilorin ABSTRACT The issue of how much a company should pay its stockholders, as dividend is one that has been of concern to managers for a long time. The optimal dividend policy of a firm may be defined as the best…

    • 4729 Words
    • 19 Pages
    Best Essays
  • Powerful Essays

    Dividend Policy

    • 5995 Words
    • 24 Pages

    Determinants of Dividend Policy in the UK Badar Khalid Al Shabibi Faculty, Accounting & Finance, Department of Business Studies Ibra College of Technology, Sultanate of Oman E-mail: baderkh14@hotmail.com Tel: +968-95142254; Fax: +968-25587950 G Ramesh Faculty, Accounting & Finance, Department of Business Studies Ibra College of Technology, Sultanate of Oman E-mail: drrameshg@gmail.com Tel: +968-96149365; Fax: +968-25587950 Abstract This research aims to examine the factors which affect dividend policy for nonfinancial…

    • 5995 Words
    • 24 Pages
    Powerful Essays
  • Powerful Essays

    Dividend Policies

    • 12438 Words
    • 50 Pages

    ABSTRACT The dividend Decision is one of the core elements of modern corporate financial management. A reasonable dividend Decision will help the company in the capital markets and establish a good corporate image for the company's long-term development and create favorable conditions for the listed company's financial decision-making, dividend Decision has a positive significance. Appropriate dividend distribution Decision can not only set a good corporate image, but also to build the confidence…

    • 12438 Words
    • 50 Pages
    Powerful Essays
  • Powerful Essays

    Dividend Policy

    • 4977 Words
    • 20 Pages

    management must decide on the form of the dividend distribution, generally as cash dividends or via a share buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash. The purpose of an optimal dividend policy should be to maximize shareholders’ wealth…

    • 4977 Words
    • 20 Pages
    Powerful Essays