Assume that you were recently hired by a national consulting firm, which has been asked to help alpha Corp. prepare for its public offering. Your supervisor has asked you to make a presentation to the company's senior management in which you review the theory of dividend policy and discuss the flowing questions:
a) What is meant by the term "dividend policy"?
b) What is signaling?
c) What is the clientele effect?
d) Assume that Alpha has an $800,000 capital budget planned for the coming year. You have determined that its present capital structure (60% equity and 40% debit) is optimal, and its net income is forecasted at $600,000) Use the residual dividend model approach to determine Alpha's total dollar dividend and payout ratio. In the process, explain how the residual dividend model works. Then explain what would happen if net income was forecasted at $400,000 and at $800,000.
This solution is comprised of detailed explanation of dividend policy, signaling, clientele effect, and step-by-step calculation of the residual dividend method.