Question

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

The firm’s net income increases.

The company increases the percentage of equity in its target capital structure.

The number of profitable potential projects increases.

Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed.

Earnings are unchanged, but the firm issues new shares of common stock.

Answer 1

Option A is correct.

As per the residual dividend policy, shareholders are paid dividend from the residual or leftover equity. The firm first keeps money for all their running projects or any new project they want to finance from net income. And if anything left over that is paid as dividend. If nothing is left from the earnings, then no dividend is paid. Therefore, if net income increasing being payment for projects constant, higher amount will be leftover and hence, higher amount of money will be paid as dividend.