If a Firm Adheres Strictly to the Residual Dividend Policy

question 43

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:

Manufacturing Overhead

Represents indirect costs involved in producing goods, including maintenance expenses, quality control, and equipment depreciation.

Variable Manufacturing Overhead

The portion of manufacturing overhead costs that vary directly with production volume, such as supplies and indirect labor.

Fixed Manufacturing Overhead

Costs that do not vary with the level of production or sales, such as rent, property taxes, and salaries of permanent employees.

Variable Manufacturing Overhead

Costs of manufacturing that fluctuate with the level of production, such as utilities or commissions, excluding direct materials and direct labor.