Which of the following statements would be consistent with the residual dividend theory?
A) Wealthy investors prefer corporations to defer dividend payments because capital gains produce greater after-tax income.
B) Dividends are more certain than capital gains.
C) Dividends should only be paid if a firm has profits in excess of the amount needed to finance the current year's capital investments.
D) Investors are indifferent whether stock returns come from dividend income or capital gains income.

Question

Quizplus · Accepted Answer

The residual dividend theory states that dividends should only be paid if a firm has profits in excess of the amount needed to finance the current year's capital investments. Therefore, statement C is consistent with this theory. Statements A and D suggest that investors prefer capital gains over dividends, which is not necessarily consistent with the residual dividend theory. Statement B is also not consistent with the theory, because it suggests that dividends are more certain than capital gains, whereas the residual dividend theory assumes that investors are indifferent between dividends and capital gains.

Which of the Following Statements Would Be Consistent with the Residual