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Residual Dividend Policy and Borrowing Money to Pay Dividends

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A) Discuss the pros and cons of having the directors' formally announce what a firm's dividend policy will be in the future.

B) Would it ever be rational for a firm to borrow money in order to pay dividends? Why or why not?

C) One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investments.
i. Explain what a residual dividend policy implies, illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.
ii. Where we considered the relationship between capital structure and the cost of capital. If the WACC-versus-debt-ratio plot were shaped like a sharp V, would this have a different implication for the importance of setting dividends according to the residual policy than if the plot were shaped like a shallow bowl (or a flattened U)?

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