There are many ways that a firm can choose

There are many ways that a firm can choose to pay dividends but only one, the passive residual dividend model, is consistent with shareholder wealth maximization. Why is this the case?

Assume a firm’s capital budget is as follows:

Boom 450M, Normal 300M, Recession 150M

Current Net Income is 50 M

The preferred capital structure of the firm is Debt=90%, Equity=10%

What will the dividend be for this firm in each of the economic scenarios if the firm follows the residual dividend policy?

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