If a firm adheres strictly to the residual distribution policy with all distributions in the form of dividends), then if its optimal capital budget requires the use of all earnings for that year (along with new debt according to the optimal debt/total assets ratio), the firm should pay
A) No dividends except out of past retained earnings.
B) No dividends to common stockholders.
C) Dividends, in effect, out of a new issue of common stock.
D) Dividends by borrowing the money (debt).
E) Either c or d above could be used.

Question

Quizplus · Accepted Answer

Under the residual distribution policy, dividends are paid only from leftover earnings after all optimal capital budget needs are met. If all earnings are required for the capital budget, no dividends are paid.

If a Firm Adheres Strictly to the Residual Distribution Policy