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?