If a Firm Adheres Strictly to the Residual Distribution Policy

question 49

Multiple Choice

If a firm adheres strictly to the residual distribution policy with all distributions in the form of dividends) , then if its optimal capital budget requires the use of all earnings for that year (along with new debt according to the optimal debt/total assets ratio) , the firm should pay

• A) No dividends except out of past retained earnings.
• B) No dividends to common stockholders.
• C) Dividends, in effect, out of a new issue of common stock.
• D) Dividends by borrowing the money (debt).
• E) Either c or d above could be used.

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Definitions:

Profit-Maximizing Output

The point of production where a company reaches its maximum possible profit.

Antimacassars

Protective coverings placed over the backs or arms of chairs and sofas to prevent soiling or wear, originally designed to protect furniture from the macassar oil used in men's hair grooming in the 19th century.

Labor Supply Curve

A graphic representation showing the relationship between the wage rate and the quantity of labor that workers are willing to supply.

Marginal Cost

The extra cost incurred by producing one more unit of a product or service; important in determining the optimal production level.