A firm that follows a residual dividend policy must believe that the dividend irrelevance theory is correct.

Question

Quizplus · Accepted Answer

A residual dividend policy means that the firm decides to first invest in all profitable projects and then distributes the remaining earnings as dividends. This policy is based on the belief that investors value the firm based on its future earnings potential, not on its dividend payout. Therefore, the firm does not follow the dividend irrelevance theory.

A Firm That Follows a Residual Dividend Policy Must Believe