CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

The Residual Dividend Policy leads to:
A. a highly unstable dividend policy.
B. the firm maintaining a constant absolute amount of dividends.
C. the firm maintaining a steady growth of dividends.
Explanation: Under the Residual Dividend Policy, a firm first determines the amount of capital it requires for sufficiently profitable projects. It then uses retained earnings to supply equity capital and raises debt in the proper amount to maintain the target capital structure. If any earnings are left over after this, they are paid out as dividends. If not, the firm will not only not pay any dividends but also issues new equity for financing. Thus, the amount of dividends paid out can swing wildly from one year to the next, based on the current business conditions and future growth prospects.

User Contributed Comments 1

User Comment
adansaenz Conclusion: Residual dividend policy is bad for a risk averse investor.
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