If a Firm Adheres Strictly to the Residual Dividend Policy

question 36

Multiple Choice

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) no dividends to common stockholders.
• B) dividends only out of funds raised by the sale of new common stock.
• C) dividends only out of funds raised by borrowing money (i.e., issue debt).
• D) dividends only out of funds raised by selling off fixed assets.
• E) no dividends except out of past retained earnings.

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Definitions:

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Chapter 7 Bankruptcy

A segment of U.S. bankruptcy law allowing for the liquidation of a debtor's assets to pay off creditors as part of a bankruptcy proceeding.

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