According to the Residual Theory of Dividends, If the Firm's

question 70

Multiple Choice

According to the residual theory of dividends, if the firm's equity need exceeds the amount of retained earnings, the firm would

• A) borrow to pay the cash dividend.
• B) sell additional stock to pay the cash dividend.
• C) pay no cash dividends.
• D) not need to consider its dividend policy.

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Definitions:

Carrying Cost

The total cost of holding inventory, including storage, insurance, taxes, opportunity costs, and depreciation.

Fixed Costs

Costs that do not change when the quantity of output changes during a particular time period.

Break-Even Default Rate

The rate of default at which a lender breaks even on a loan, neither earning a profit nor incurring a loss.

Monthly Interest Rate

The interest rate expressed as a monthly percentage, reflecting the cost of borrowing or the earnings on savings for one month.