Which of These Actions Is an Illustration of the Residual

question 10

Multiple Choice

Which of these actions is an illustration of the residual theory of dividends?

• A) Boosting EPS by buying back shares to reduce the pool of shareholders to whom dividends are distributed.
• B) Reducing the Dividend Payout Ratio to improve EPS.
• C) Retaining earnings in a reserve fund to ensure sufficient cash for distribution to shareholders.
• D) Replacing distributed dividends with riskier debt capital to lower cost of capital.
• E) Funding projects with a positive NPV and distributing the rest of the earnings as dividends.

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Definitions:

Marginal Benefit

The supplementary value obtained from the consumption of an extra unit of a good or service.

Optimal Quantity

The ideal amount of a good or service that maximizes efficiency or utility, taking into account costs and benefits.

Marginal Curve

Refers to graphs like the marginal cost curve or marginal revenue curve, which show how the cost or revenue changes with an additional unit of output.

Profit-Maximizing Principle

An economic concept that companies aim to achieve where they generate the maximum possible profits by adjusting output levels.