Your firm follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?
A) The firm's net income increases.
B) The company increases the percentage of equity in its target capital structure.
C) The number of profitable potential projects increases.
D) Congress lowers the tax rate on capital gains, leaving the rest of the tax code unchanged.
E) Earnings are unchanged, but the firm issues new shares of common stock.

Question

Quizplus · Accepted Answer

A strict residual dividend policy means that dividends will be paid from residual earnings after all investment needs have been met. Therefore, if the firm's net income increases, there will be more residual earnings available to pay as dividends, leading to an increase in the firm's dividend per share. None of the other choices directly affect the amount of residual earnings available for dividends.

Your Firm Follows a Strict Residual Dividend Policy