According to the residual theory of dividends, if a firm's equity need exceeds the amount of retained earnings, the firm would ________.
A) borrow to pay the cash dividend
B) sell additional stock to pay the cash dividend
C) pay no cash dividends
D) pay less dividends

Question

Quizplus · Accepted Answer

The residual theory of dividends suggests that a firm should pay out dividends only after satisfying its equity needs (i.e. investments, debt repayments, reserves, etc.) from the retained earnings. If the equity needs exceed the retained earnings, the firm would not pay cash dividends. Instead, it may opt to raise additional capital (by borrowing or selling stock) or delay dividends until a later time.

According to the Residual Theory of Dividends, If a Firm's