The residual theory of dividends connects a firm's dividend policy and its level of capital investments.

Question

Quizplus · Accepted Answer

The residual theory of dividends suggests that a firm's dividend policy is determined by the amount of funds left over after financing its capital investments. In other words, the firm will invest in projects that have a positive net present value (NPV) and then pay out any remaining profits as dividends. Therefore, the level of capital investments will have an impact on the amount of funds available for dividend payments.

The Residual Theory of Dividends Connects a Firm's Dividend Policy