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Unformatted text preview: 15A-1 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 itsInc....
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- Spring '10