23. The residual dividend approach is based on the premise that: A) The sale of

Question

23. The residual dividend approach is based on the premise that: A) The sale of new equity is a desirable alternative to altering dividend payout. B) Maintaining a predictable dividend payout is not a primary objective. (C) Dividends on preferred stock must be paid first with common shareholders getting what's leftover; that is, the residual. D) A signalling effect exists. E) A firm's investment needs are of secondary concern to its dividend policy. 23. The residual dividend approach is based on the premise that: A) The sale of new equity is a desirable alternative to altering dividend payout. B) Maintaining a predictable dividend payout is not a primary objective. (C) Dividends on preferred stock must be paid first with common shareholders getting what's leftover; that is, the residual. D) A signalling effect exists. E) A firm's investment needs are of secondary concern to its dividend policy. 23. The residual dividend approach is based on the premise that: A) The sale of new equity is a desirable alternative to altering dividend payout. B) Maintaining a predictable dividend payout is not a primary objective. (C) Dividends on preferred stock must be paid first with common shareholders getting what's leftover; that is, the residual. D) A signalling effect exists. E) A firm's investment needs are of secondary concern to its dividend policy. (C) Dividends on preferred stock must be paid first with common shareholders getting what's leftover; that is, the residual. D) A signalling effect exists. E) A firm's investment needs are of secondary concern to its dividend policy.

Explanation / Answer

The residual dividend approach is based on the premise that maintaing a predictable dividend payout is not a primary objective. It is because this model based on the premise that investors prefer to have a firm retain and reinvest earnings rather than pay them out in dividends if the rate of return the firm can earn on reinvested earnings exceeds the rate of return investors can obtain for themselves on other investments of comparable risk. It is less expensive for the firm to use retained earnings than it is to issue new common stock.

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