According to the residual theory of dividends, if a firm's equity need is less than the amount of retained earnings, the firm would ________.
A) borrow to pay the cash dividend
B) declare a dividend equal to the remaining balance
C) pay no cash dividends
D) pay dividends higher than the remaining balance to gain credibility

Question

Quizplus · Accepted Answer

The residual theory of dividends suggests that dividends should be paid from the remaining balance after all profitable investment opportunities have been funded. Therefore, if a firm's equity need is less than the amount of retained earnings, it would declare a dividend equal to the remaining balance.

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