If a Firm Adheres Strictly to the Residual Dividend Policy

question 11

Multiple Choice

If a firm adheres strictly to the residual dividend policy, and 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) the same dividend as it paid the prior year.
• 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 borrowing money (i.e., issuing debt).
• E) dividends only out of funds raised by selling off fixed assets.

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Definitions:

Bulldozer

A heavy, tractor-like vehicle with a large, metal plate used to push large quantities of soil, sand, rubble, or other such material during construction or conversion work.

Capital Loss Deduction

A tax deduction for losses incurred on the sale of an asset held for investment, allowing for the offset of capital gains or regular income up to certain limits.

Business Property

Assets and property owned by a business used in the operation and function of the business, including real estate, equipment, and intellectual property.

Casualty

A sudden, unexpected, or unusual event that causes damage or loss, often used in reference to natural disasters for tax deduction purposes.