If a firm adheres strictly to the residual distribution policy (with all distributions in the form of dividends), a sale of new common stock by the company would suggest that
A) The dividend payout ratio has remained constant.
B) The dividend payout ratio is increasing.
C) No dividends were paid for the year.
D) The dividend payout ratio is decreasing.
E) The dollar amount of investments has decreased.

Question

Quizplus · Accepted Answer

Under the residual distribution policy, dividends are paid only after all profitable investment opportunities are funded. If the company is selling new stock, it indicates that internal funds were insufficient to cover investments, leaving no residual funds for dividends.

If a Firm Adheres Strictly to the Residual Distribution Policy