According to the residual theory of dividends, if the firm's equity need exceeds the amount of retained earnings, the firm would
A) not need to consider its dividend policy.
B) pay no cash dividends.
C) borrow to pay the cash dividend.
D) sell additional stock to pay the cash dividend.

Question

Quizplus · Accepted Answer

The residual theory of dividends suggests that a company should first meet all of its equity capital needs for any new investments or projects from retained earnings. If the equity need (the amount required by the company for new investments or projects) exceeds the amount of retained earnings, the company should not pay cash dividends. Therefore, the best choice is option B, which states that the company would pay no cash dividends.

According to the Residual Theory of Dividends, If the Firm's