If a firm adheres strictly to the residual dividend policy, the issuance of new
ID: 2651121 • Letter: I
Question
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.
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.
Explanation / Answer
Answer: 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.
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