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

Question

Quizplus · Accepted Answer

If a firm follows a residual dividend policy, it pays dividends only after all acceptable investment opportunities are funded. Issuing new stock suggests that internal funds were insufficient, implying no dividends were paid, as retained earnings were used for investments.

If a Firm Adheres Strictly to the Residual Dividend Policy