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:

Monopolist

A single seller in a market who has significant control over the price and supply of a product or service.

Horizontal Labor Supply Curve

Suggests that the supply of labor remains constant regardless of changes in wage rates.

Returns To Scale

The rate at which output increases as inputs are increased proportionately in the production process, indicating economies or diseconomies of scale.

Downward-Sloping

A term used to describe a graph line that decreases in height as it moves from left to right, commonly associated with demand curves in economics, indicating that quantity demanded decreases as price increases.