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:

Net Exports

The value of a country's total exports minus the value of its total imports.

Infant Industries

Industries in the early stages of development that may be protected from international competition to allow them to grow.

Free Trade

Free trade is a policy to eliminate restrictions on international trade, allowing goods and services to move freely across borders without tariffs, quotas, or other barriers.

Dumping

Selling a good in a foreign country at a lower price than it’s sold for in the domestic market.