Residual dividend policy
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1. Trenton Publishing follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?
a. The firm's net income increases.
b. The company increases the percentage of equity in its target capital structure.
c. The number of profitable potential projects increases.
d. Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed.
e. Earnings are unchanged, but the firm issues new shares of common stock.
Discuss fully the reasons for your choice, then discuss briefly why the other choices are incorrect.
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Solution Summary
The solution explains the multiple choice question in relation to residual dividend policy
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The correct answer is
a. The firm's net income increases.
If the net income increases and all else equal we would have more net income available for distribution and so the dividends per share would increase
The others are incorrect because
b. The company increases the percentage of equity in its target ...
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