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:

Muffins

Baked goods that are usually sweet, made from batter or dough, and often enjoyed as a breakfast food or snack.

Comparative Advantage

The ability of an individual or group to carry out a particular economic activity (such as production of a specific good) more efficiently than another activity.

Compasses

Instruments used for navigation and orientation that show direction relative to the geographic cardinal directions.

Muffins

A small, baked item that is typically sweet, made from batter or dough.