IF a firm adheres strictly to the residual dividend policy, AND if its optimal capital budget requires the use of ALL earnings for a given year, then the firm should pay: no dividends except out of past retained earnings. no dividends to common stockholders. dividends only out of funds raised by the sale of new common stock. dividends only out of funds raised by borrowing money (i. e., issue debt). dividends only out of funds raised by selling off fixed assets.

If a firm adheres strictly to the residual dividend policy, and if its optimal capital budget requires the use of all earnings for a given year, then the firm should pay: no dividends to common stockholders (Option B is the correct answer choice).

Explanation:

According to the residual dividend policy, dividends are expected to be part of the earnings, and which cannot be invested at a rate at least equal to the weighted average cost of capital (WACC).

A firm should therefore not pay dividends to common stockholders, provided that she strictly adheres to the residual dividend policy, and if her optimal capital budget requires the use use of all earnings for a given year.  

Hence, option B is the correct answer choice.

There will be "no dividend to common Stockholders".

Explanation: Companies use residue dividend as a dividend policy when calculating dividends to be paid to shareholders. Residue dividend policy make a company fund capital expenditures with the available earnings before paying shareholders' dividends.

In this scenario Residue dividend policy and if its optimal capital budget requires the use of all earnings in a given year, the firm is expected to pay "no dividend to common stockholders". The reason why is because the firm have to fund its capital expenditures with available earnings.

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