Chapter 15 - Web Appendix 15A

Chapter 15 - Web Appendix 15A - WEB APPENDIX 15A An...

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WEB APPENDIX 15A An Example: The Residual Dividend Model In Chapter 15, 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 large 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 also is 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 payout policy. This spreadsheet is provided in
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This note was uploaded on 01/11/2012 for the course FIN 3403 taught by Professor Tapley during the Fall '06 term at University of Florida.

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Chapter 15 - Web Appendix 15A - WEB APPENDIX 15A An...

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