Which of the following statements about the residual dividend theory is FALSE?
A)The firm will maintain its optimum debt ratio in financing future investments.
B)Dividend policy by itself has no direct influence on the market price of the firm's common stock.
C)The firm will issue new common stock to finance investment opportunities in order to ensure that some dividend will be paid.
D)The firm's investment opportunities,capital structure,and profitability all influence the firm's dividend policy.

Question

Quizplus · Accepted Answer

The residual dividend theory suggests that a firm will first finance its investment opportunities with retained earnings and then distribute the remaining earnings, or residual dividends, to shareholders. If the firm needs additional funds to finance investments, it will issue debt or equity securities. However, the theory does not suggest that a firm will issue new common stock specifically to ensure that some dividend will be paid. Rather, the decision to issue new equity would depend on the firm's overall financing needs and capital structure.

Which of the Following Statements About the Residual Dividend Theory