If a firm adheres strictly to the residual dividend policy, the issuance of new common stock...
If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that
- no dividends to common stockholders.
- dividends only out of funds raised by the sale of new common stock.
- dividends only out of funds raised by borrowing money (i.e., issue debt).
- dividends only out of funds raised by selling off fixed assets.
- no dividends except out of past retained earnings.
Homework Answers
The Answer Is : no dividends to common stockholders.
A residual dividend policy is one where a company uses residual or leftover equity to fund dividend payments. When the firm issues common stock in a year, it would generally suggest that there is lack of funds and hence the issue is made to generate funds. In such a case, there will be no declaration of dividends to the common stockholders.
The residual dividend policy says that the dividends should be part of earnings and which cannot be invested at a rate at least equal to the WACC.
If a firm adheres strictly to the residual dividend policy, and if its optimal capital budget requires the use of all earnings for a given year, then the firm should not pay dividends to common stockholders.
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