Purple Hedgehog Forestry Group has generated earnings of $140,000,000. Its target capital structure consists of 60% equity and 40% debt. It plans to spend $85,000,000 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 Purple Hedgehog Forestry's dividend ratio be if it follows a residual distribution policy?
a. 63.40%
b. 47.55%
c. 79.25%
d. 71.33%

Purple Hedgehog Forestry is considering using more equity and less debt in its capital Structure. Which Of these statements best describes how this will affect the firm's annual dividend, assuming that all other factors are held
constant?

a. Purple Hedgehog Forestry will pay a smaller annual dividend if it goes forward with this decision.
b. Purple Hedgehog Forestry's annual dividend will be greater if it goes forward with this decision.

1.63.57%

2.a. Purple Hedgehog Forestry will pay a smaller annual dividend if it goes forward with this decision.

Explanation:

1. Calculation of what will Purple Hedgehog Forestry's dividend ratio be if it follows a residual distribution policy

Total the amount of Dividend paid using the residual dividend policy will be:

Total Dividend = Net Income – [Total Capital Budget x Equity Ratio]

Let plug in the formula

= $140,000,000 – [$85,000,000 x 60%]

= $140,000,000 - $51,000,000

= $89,000,000

The Expected Dividend pay-out Ratio for this year will be:

Expected Dividend Pay-out Ratio = [Total Dividend Paid / Net Income] x 100

Let plug in the formula

= [$89,000,000 / $140,000,000] x 100

= 63.57%

Therefore Purple Hedgehog Forestry Group’s dividend payout ratio will be 63.57%”

2.The statements that best describes how this will affect the firm’s annual dividend, assuming that all other factors are held constant will be

Statement-A which state that "Purple Hedgehog Forestry Group will pay a smaller annual dividend if it goes forward with this decision."