If a firm adheres strictly to the residual dividend policy, what would the issuance of new common stock suggest?

Name: If a firm adheres strictly to the residual dividend policy, what would the issuance of new common stock suggest?
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Question

Quizplus · Accepted Answer

Under a residual dividend policy, dividends are paid only after all acceptable investment opportunities have been funded. Issuing new common stock suggests that the firm did not have enough retained earnings to fund its investments, implying no dividends were paid.

If a Firm Adheres Strictly to the Residual Dividend Policy