In establishing a dividend policy, a firm should retain funds for investment in projects yielding higher returns than the owners could obtain from external investments of equal risk.

Question

Quizplus · Accepted Answer

The purpose of a dividend policy is to balance the retention of funds for investment with the distribution of profits to shareholders. In order to maximize shareholder value, a firm should only pay out as much in dividends as it can afford while still retaining enough funds for investment in high-return projects. This ensures that shareholders receive a fair return on their investment while also allowing the company to grow and increase its value over time.

In Establishing a Dividend Policy, a Firm Should Retain Funds