Question

Which of the following statements is correct?

a. If a firm follows the residual dividend model, then a sudden increase in the number of profitable projects would be likely to lead to a reduction of the firm's dividend payout ratio
b. The clientele effect explains why so many firms change their dividend policies so often
c. One advantage of adopting the residual dividend model is that this policy makes it easier for a corporation to attract a specific and well-identified dividend clientele
d. New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity
e. Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received

Answer 1

The answer is: A) If a firm follows the residual dividend model, then a sudden increase in the number of profitable projects would be likely to lead to a reduction of the firm's dividend payout ratio

Step-by-step explanation:

If a company uses the residual divided policy it means that it will decide the amount to distribute as dividends using the following formula:

• dividends = earnings - money required to finance projects

So if the number of profitable projects suddenly increases, then the amount of money needed to fund those projects will also increase, therefore reducing the amount left for dividends.

On the long run those profitable projects should increase the earnings of the company and the dividends.