Session 18: Earnings Distribution Decisions

Additional Concept
PGP, IIM INDORE
Residual Dividend Policy
•Identify Uses of Funds
• Net Uses: Capex + Change in NWC – Depreciation

•Fund Net Uses from Net Income

• Note: If target D/V ratio, fund net uses from Debt and equity in the proportion of weights

•Dividend (if surplus funds) = Net Income – Net Uses

•If Residual Dividend policy is undertaken on annual basis then dividends could be highly volatile
• May address this limitation by adopting the residual dividend policy over the long run
Reference
Bruner, R. F. & Opitz, C. S. (2002). Eastboro Machine Tools Corporation. Darden Id. UV0013.
Charlottesville, VA: Darden Business Publishing