If a Firm Adheres Strictly to the Residual Dividend Policy

question 16

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 except out of past retained earnings.
• 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., issue debt).
• E) dividends only out of funds raised by selling off fixed assets.