Question

Which of the following statements is correct? a. One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele. b. If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout. c. The clientele effect can explain why so many firms change their dividend policies so often. 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

Answer: 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:

A residual dividend is a dividend policy used by companies to calculate the dividends the company wants to pay its shareholders. Companies which use a residual dividend policy typically fund capital expenditures with the available earnings before they pay dividends to their shareholders.

If the residual dividend policy is used by a firm, when there is an increase in number of profitable projects that the firm wants to undertake, this will likely lead to a reduction in the dividend payout of the firm. This is because most of the earnings gotten would have been used for the projects.