Question

The residual theory of dividends suggests that dividends are __________ to the value of the firm.

Answer 1

(.) irrelevant

What is a dividend?

A corporation may distribute a portion of its profits as a dividend to its shareholders when it experiences a profit or surplus. Any remaining funds are withdrawn and reinvested back into the company (called retained earnings). A corporation is typically not allowed to pay a dividend out of its capital; therefore, both the profit from the current year and the retained earnings from prior years are eligible for distribution. If the company has a dividend reinvestment plan, the amount can be paid via the issue of more shares or by share repurchase. Distribution to shareholders can also be made in cash (often a transfer into a bank account). The distribution may occasionally consist of assets.

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