If a Firm Adheres Strictly to the Residual Dividend Model,then

question 49

Multiple Choice

If a firm adheres strictly to the residual dividend model,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:

Portfolio Diversification

A risk management technique that mixes a wide variety of investments within a portfolio.

S&P/TSX 60 Index

A stock market index of 60 large companies listed on the Toronto Stock Exchange, representing leading sectors in Canada.

Alcan

Alcan was a Canadian mining company and manufacturer of aluminum products, which became part of Rio Tinto Alcan after its acquisition.

Systematic Risk

The inherent risk associated with the entire financial system or market, which cannot be eliminated through diversification.