Which of the following statements is CORRECT?
A) If a firm follows the residual dividend model,then a sudden increase in the number of profitable projects would be likely to lead to a reduction of the firm's dividend payout ratio.
B) The clientele effect explains why so many firms change their dividend policies so often.
C) One advantage of adopting the residual dividend model is that this policy makes it easier for a corporation to attract a specific and well-identified dividend clientele.
D) New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity.
E) Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.

Question

Quizplus · Accepted Answer

The residual dividend model implies that dividends are paid out from leftover earnings after all profitable projects have been funded. Therefore, if there's an increase in profitable projects, the firm would use more of its earnings to invest in these projects, leaving less for dividends, which could lead to a reduction in the dividend payout ratio.

Which of the Following Statements Is CORRECT