Dividend Policy It is sometimes suggested that firms should follow a “residual” dividend policy. With such a policy, the main idea is that a firm should focus on meeting its investment needs and maintaining its desired debt-equity ratio. Having done so, a firm pays out any leftover, or residual, income as dividends. What do you think would be the chief drawback to a residual dividend policy?

The dividend policy that pays dividends only when there are excess earnings after meeting all investment needs is known as:a.Stable dividend policyb.Residual dividend policyc.Constant dividend policyd.Irregular dividend policy

Dividend policy of a firm is governed by:(i) Long Term Financing Decision:As we know that one of the financing options is ‘Equity’. Equity can either be raisedexternally through issue of new equity shares or can be generated internally throughretained earnings. For Equity, retained earnings are preferable because they do notinvolve any floatation costs (issue expenses).But whether to retain or distribute the profits, forms the basis of this decision.Further, payment of cash dividend reduces the amount of funds required to financeprofitable investment opportunities thereby restricting its financing options.In this backdrop, the decision is based on the following:1. Whether the organization has opportunities in hand to invest the profit,if retained?2. Whether the return on such investment (ROI) will be higher than theexpectations of shareholders i.e. Ke?

Dividend policies in practice vary across companies based on:a.Industry norms and competitive factorsb.Regulatory requirements and tax implicationsc.Cash flow availability and future investment opportunitiesd.All of the above

The bird-in-hand theory of dividend policy suggests that investors prefer:a.Higher dividends today rather than uncertain capital gains in the futureb.Lower dividends today in exchange for potential capital gains in the futurec.Dividends paid in the form of additional shares rather than cashd.Dividends paid irregularly based on company performance

In theory, a high dividend payout policy should result for the company inALow earnings reinvestment rate and lower growth of net profitBHigh earnings reinvestment rate and lower growth of net profitCLow earnings reinvestment rate and higher growth of net profitDHigh earnings reinvestment rate and higher growth of net profit