Question

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 firm’s net income increases.b.The company increases the percentage of equity in its target capital structure.c.The number of profitable potential projects increases.d.Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed.e.Earnings are unchanged, but the firm issues new shares of common stock.

Answer 1

Answer:A. The firm’s net income increases.

Explanation:Residual Dividend policy is a dividend payments system or policy adopted by companies where dividends are only paid after all capital projects expenditures have been completely accounted and removed from the company's earnings, the remaining balance will now be used to calculate the dividends if shareholders.

THE DIVIDENDS PAID ARE CALCULATED AFTER REMOVING THE COST OF CAPITAL PROJECTS FROM THEIR EARNINGS.

Answer 2

Answer:

a.The firm’s net income increases

Explanation:

A residual dividend policy model is used when funding capital expenditure with available earnings, before, paying dividends.  This is done by companies that prioritise investment in growth opportunity before paying shareholders their dividends. There residual dividend policy assumes that investors have no preference between returns in dividends or returns in capital gains. (Chen, 2019)

It is calculated as net income / total assets = return on assets. Return on assets is a good measure of the companies’ performance.  

Option A would result in the company investing more on capital and more on dividends.

Option B results in more equity than liabilities in capital structure.

Option C would result in more money invested in capital structure to undertake those potential projects .

Option D results in more investment on capital gains since there is less tax to be charged.  

Option E results in dividends being paid out to more people and less amount per share.  

Option A will most likely result in a higher dividend per share being paid out.