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

Question

Quizplus · Accepted Answer

If a firm adheres strictly to the residual dividend policy and if its optimal capital budget requires the use of all earnings for a given year, then there will be no excess earnings left to pay out as dividends to common stockholders. As per the residual dividend policy, dividend payments are made from the residual or leftover earnings after funding all the investment opportunities. Therefore, the firm should retain all earnings for reinvestment and not pay any dividend to the common stockholders. Hence, the correct choice is B) no dividends to common stockholders.

If a Firm Adheres Strictly to the Residual Dividend Policy,and