Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?
A) The company increases the percentage of equity in its target capital structure.
B) The number of profitable potential projects increases.
C) Congress lowers the tax rate on capital gains.The remainder of the tax code is not changed.
D) Earnings are unchanged, but the firm issues new shares of common stock.
E) The firm's net income increases.

Question

Quizplus · Accepted Answer

Reynolds Paper Products Corporation follows a residual dividend policy, which means that dividends are paid only after the company has financed all profitable projects and maintained its desired level of internal financing. Thus, an increase in net income would provide the company with more funds to pay dividends, as it would have more profits available to distribute after meeting its desired level of internal financing. None of the other factors listed would necessarily lead to an increase in the firm's dividend per share.

Reynolds Paper Products Corporation Follows a Strict Residual Dividend Policy