1. Business
2. Finance
3. Derivatives
4. Options
5. 10451

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Which choice is correct and why?

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for that year (along with new debt according to the optimal debt/total assets ratio), the firm should pay
a. no dividends except out of past retained earnings.

b. no dividends to common stockholders.

c. dividends, in effect, out of a new issue of common stock.

d. dividends by borrowing the money (debt).

e. Either choice c or d could be used.