According to the Residual Theory of Dividends

question 42

Multiple Choice

According to the residual theory of dividends,

• A) dividends are a residual after investment financing needs have been met.
• B) earnings remaining after payment of preferred stock dividends should be paid to common stockholders.
• C) dividend payments are a constant percentage of earnings per share.
• D) a dividend is the residual above the payout ratio.

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Definitions:

NPV Method

A method of evaluating investments by calculating the Net Present Value of the project's cash inflows and outflows discounted at the investment's cost of capital.

Discount Rate

The rate utilized in the process of calculating the present value of a financial instrument's future cash flows by discounting them.

Accept Decision

In decision-making, particularly in business, the choice to proceed with a particular action or proposal based on analysis or criteria satisfaction.

Payback Method

An investment appraisal technique that calculates the time required to recoup the cost of an investment.