Question

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. dividends only out of funds raised by borrowing money (i.e., issue debt). b. no dividends to common stockholders. c. dividends only out of funds raised by the sale of new common stock. d. no dividends except out of past retained earnings.

Answer 1

Answer: (b).no dividend to common stakeholders.

Explanation: The firm should pay no dividend to common stakeholders because the optimal capital requires the use of all their earnings for a given year.