Question

Dividend payment linked to profits left out after meeting the expansion needs is based on ....theory policy?
a)Signalling Theory
b)Residual payout policy
c)Stable dividend policy
d)Constant payout policy

Answer 1

The answer that suits best to this question is “b” that is RESIDUAL PAYOUT POLICY which is also known as the Residual dividend policy.

In this type of payment policy, the company distributes the profit that is left after fulfilling the expansion needs of the company.

Therefore, if the company requires establishing or acquiring a new asset or funding a latest project, then dividend payments takes a back step and the funding is given priority.

Answer 2

b)Residual payout policy

Explanation:

• A residual dividend is a policy of dividends wherein corporations adopt when determining the dividends owed to "shareholders". Companies which use a "residual dividend policy" finance capital expenditure with "available earnings" prior to  paying shareholders' dividends
• Companies implement residual dividend programs to prioritise capital outlays against immediate dividend distributions to shareholders.
• Companies which adopt a "residual dividend policy invest in profit-making growth opportunities prior to actually paying dividend to shareholders.
• Management implements a residual dividend policy so as to invest in the creation of the business, such as improving manufacturing capacity or introducing new methods of minimising waste, which in theory leads to bigger long-term growth.
• With an imminent decrease in "dividend payouts" &  "fluctuation" over time on the amounts, management can need to explain its shareholders decisions.
• The "residual dividend policy" is taken on the basis of the assumption whereby shareholders have no choice if their returns are in the form of "immediate dividends" or "long-term capital gains".

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