The residual dividend theory suggests that dividends will only be paid
A) if the tax rate on capital gains is higher than the tax rate on dividends.
B) if the corporation has more positive NPV projects than it can fund.
C) if interest rates available to shareholders are higher than the required return on the company's stock.
D) if current retained earnings exceed the equity portion of the firm's capital budget.

Question

Quizplus · Accepted Answer

The residual dividend theory posits that dividends should be paid out from the residual or leftover equity only after all project capital needs are met. This means dividends are distributed if and only if the firm's retained earnings exceed what is needed for the equity portion of its capital budget, ensuring that investment in positive NPV projects is prioritized.

The Residual Dividend Theory Suggests That Dividends Will Only Be