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Which One of the Following Statements Is Correct About a Firm

Question 335

Multiple Choice

Which one of the following statements is correct about a firm that adheres to a strict residual dividend policy? Assume that the amount of earnings each year exceeds the amount of capital spending.

A) The dividend yield on the stock will be constant over time.
B) The dividend payout ratio will be constant.
C) The debt-equity ratio will increase each year by a percentage equal to [1/(1 + D/E) ].
D) The balance in the common stock account will increase each year by the amount of the capital spending multiplied by [1/(1 + D/E) ].
E) The retained earnings will increase each year by the amount of the capital spending multiplied by [1/(1 + D/E) ].

Correct Answer: