Your firm uses the residual dividend model to set dividend policy.Market interest rates suddenly rise,and stock prices decline.Your firm's earnings,investment opportunities,and capital structure do not change.If the firm follows the residual dividend model,then its dividend payout ratio would increase.

Question

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(1)The firm's WACC would increase, (2)this would cause fewer projects to be accepted, (3)this would lead to a smaller capital budget, (4)thus less money would be needed to fund the capital budget, (5)thus less equity would be needed,so (6)the dividend payout ratio would increase.

Your Firm Uses the Residual Dividend Model to Set Dividend