If a firm adheres strictly to the residual dividend model,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

The residual dividend model suggests that dividends should only be paid from earnings left over after all optimal investment opportunities are funded. If all earnings are needed for the capital budget, no dividends should be paid to common stockholders.

If a Firm Adheres Strictly to the Residual Dividend Model,then