Iris, Inc. follows a residual dividend policy. Iris, Inc. will have $400,000 in profits this year. It is accepting two positive net present value projects for a total cost of $450,000. How much will Lafayette, Inc. pay out to its shareholders this year?

Question

Quizplus · Accepted Answer

Under a residual dividend policy, a company pays dividends from the leftover or residual earnings after all project investments have been made. Since Iris, Inc. has profits of $400,000 but is investing $450,000 in projects, exceeding its profits, there will be no residual earnings left to pay out as dividends.

Iris, Inc Follows a Residual Dividend Policy