Question

Which of the following statements is correct?

a. If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm’s dividend payout during that year.

b. The clientele effect can explain why many firms change their dividend policies so often.

c. One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.

d. Stock dividends reduce the amount of equity on the firm’s balance sheet.

Answer 1

Correct answer is A, the company following residual dividend policy first use cash flow to fullfill the necessary capital expenditure and the remaining amount is paid out to the shareholder. hence if project of a firm increase its capital expenditure will increase and this will reduce the cash left to pay for dividend hence dividend payout reduces.