Suppose a firm adheres strictly to the residual dividend policy and 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).What should the firm 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 selling off fixed assets

Question

Quizplus · Accepted Answer

Under a residual dividend policy, a firm pays dividends from the leftover (residual) earnings after all optimal investment opportunities are funded. If all earnings are needed for the optimal capital budget, there would be no residual earnings to pay dividends, hence no dividends to common stockholders.

Suppose a Firm Adheres Strictly to the Residual Dividend Policy