The residual theory of dividends implies that if the firm can not earn a return (IRR) from investment of its earnings that is in excess of cost (WMCC), it should distribute the earnings by paying dividends to stockholders.

Question

Quizplus · Accepted Answer

The residual theory of dividends suggests that the amount of dividends a firm pays should be based on the amount of earnings that remain after the company has financed all of its investments with equity and debt, and after it has set aside funds for future investments. If the company's earnings cannot earn a return that exceeds its cost of capital, then paying dividends may be the best way to maximize shareholder value. Therefore, the statement is true.

The Residual Theory of Dividends Implies That If the Firm