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Your firm follows a strict residual dividend policy. All else equal, which of the following factors...

Your firm follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in your firm's dividend per share?

The company reduces the percentage of debt in its target capital structure.

The number of profitable potential projects increases.

Congress lowers the tax rate on capital gains.

Earnings are unchanged, but the firm buys back shares of common stock.

The firm's net income decreases.
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Answer #1

Dividends per share is ratio of total dividends by number of outstanding shares. Now if a strict residual dividend policy is used, then dividend payout is assumed to be a constant proportion of the earnings. Given that if earnings are unchanged and the the firm buys back common stock, it will lead to decrease in the number of outstanding shares thus increasing the dividends per share.

So Answer is Earnings are unchanged, but the firm buys back shares of common stock.

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