If a firm uses the residual dividend model to set dividend policy,then dividends are determined as a residual after providing for the equity required to fund the capital budget.Under this model,the better the firm's investment opportunities,the lower its payout ratio will be,other things held constant.

Question

Quizplus · Accepted Answer

In the residual dividend model, dividends are determined based on the amount of equity required to fund the capital budget. If the firm has better investment opportunities, they will require more equity to fund these projects, which will leave less available for dividend payouts, resulting in a lower payout ratio. Therefore, the statement is true.

If a Firm Uses the Residual Dividend Model to Set