If 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 except out of past retained earnings.
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., issue debt).
E) dividends only out of funds raised by selling off fixed assets.

Question

Quizplus · Accepted Answer

Under a residual dividend policy, dividends are paid only from leftover earnings after all profitable investment opportunities have been funded. If all earnings are needed for the capital budget, no dividends are paid.

If a Firm Adheres Strictly to the Residual Dividend Policy