Grainery Distillers,Inc.is experiencing high demand for its products and high growth rates.The company just reported earnings per share of $5 for the most recent year and has many positive NPV projects to fund.One vice president wants to pay a dividend of $5 per share,arguing that this will maximize shareholder value.You argue that a much smaller dividend will maximize value.Your argument may be based on
A) the bird-in-the-hand theory.
B) the residual dividend theory.
C) the information effect.
D) the very high agency costs of the corporation.

Question

Quizplus · Accepted Answer

The residual dividend theory would suggest that the company should first invest in all positive NPV projects before considering paying dividends. By doing this, the company can ensure that it is fully utilizing its available funds to generate additional value for shareholders. Only then should the company consider paying a dividend with any remaining funds. Therefore, a smaller dividend may be more appropriate in this scenario in order to maintain funding for growth opportunities.