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One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investment. a. Explain what a residual dividend policy implies, illustrating your answer with a table showing how different investment opportunities can lead to different dividend payout ratios. b. Think back to Chapter 14 where we considered the relationship between capital structure and the cost of capital. lf the WACC-versus-debt-ratio plot was shaped like a sharp V, would this have a different implication for the importance of setting dividends according to the residual policy than if the plot was shaped like a shallow bowl (a flattened U)?

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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Chapter
Section
Chapter 15, Problem 6Q
Textbook Problem

One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investment.

  1. a. Explain what a residual dividend policy implies, illustrating your answer with a table showing how different investment opportunities can lead to different dividend payout ratios.
  2. b. Think back to Chapter 14 where we considered the relationship between capital structure and the cost of capital. lf the WACC-versus-debt-ratio plot was shaped like a sharp V, would this have a different implication for the importance of setting dividends according to the residual policy than if the plot was shaped like a shallow bowl (a flattened U)?

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