a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay
A) no dividends to common stockholders.
B) dividends only out of funds raised by the sale of new common stock.
C) dividends only out of funds raised by borrowing money (i.e., issue debt).
D) dividends only out of funds raised by selling off fixed assets.
E) no dividends except out of past retained earnings.

Question

Quizplus · Accepted Answer

The residual dividend policy dictates that dividends should only be paid after all necessary investments in new projects and debt repayment have been made. If the optimal capital budget requires the use of all earnings and new debt to meet these investment needs, there would be no funds left to pay dividends. Therefore, the best choice is option A, which states that no dividends should be paid to common stockholders.

A Firm Adheres Strictly to the Residual Dividend Policy, Then