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9. For the past few years, the net income of Dino’s Delicious Dinners (DDD) has been constant. It is expected that this trend will continue for several years into the future. On the other hand, DDD’s investment opportunities—that is, capital budgeting projects with positive net present values—have fluctuated rather significantly during the past few years, and expectations are that this fluctuation will continue long into the future. Everything else equal and based on this information, which of the following dividend policies would produce the greatest fluctuation in the future dividend payments of DDD (if followed)?

a. residual dividend

b. stable, predictable dividend

c. constant payout ratio

d. low regular dividend plus extras

e. None of the above dividend policies will produce fluctuating dividends.

DDD’s net income is expected to remain constant. As a result, if the firm follows the stable, predictable dividend policy, the constant payout ratio dividend policy, or the low regular plus extras dividend policy, the dividend payment each year will be constant. Because DDD’s capital budgeting needs are expected to fluctuate significantly when earnings are expected to remain constant, the annual dividend will fluctuate significantly if DDD follows the residual dividend policy, which provides that dividends should be paid only after the firm’s capital budgeting needs are satisfied.

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