If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that
A) the dividend payout ratio has remained constant.
B) the dividend payout ratio is increasing.
C) no dividends will be paid during the year.
D) the dividend payout ratio is decreasing.
E) the dollar amount of capital investments had decreased.

Question

Quizplus · Accepted Answer

Under a residual dividend policy, dividends are paid only after all acceptable investment opportunities are funded. If new common stock is issued, it suggests that the firm does not have enough retained earnings to fund its investments, implying that no dividends will be paid.

If a Firm Adheres Strictly to the Residual Dividend Policy