What does the residual dividend model mean for a company?
Understand the Problem
The question is asking about the meaning of the residual dividend model as it applies to a company. This model relates to the way a company decides on dividend payouts based on its earnings and investment opportunities, indicating that dividends are paid from earnings left over after all profitable investments have been funded.
Answer
A company reinvests in the business first; dividends are paid only if excess cash remains.
The final answer is that the residual dividend model means a company prioritizes reinvestment in the business over paying dividends, distributing dividends only if there is excess cash after all necessary investments.
Answer for screen readers
The final answer is that the residual dividend model means a company prioritizes reinvestment in the business over paying dividends, distributing dividends only if there is excess cash after all necessary investments.
More Information
This model helps ensure that a company has enough capital for growth and crucial investments before distributing dividends.
Tips
A common mistake is assuming the residual dividend model focuses primarily on high dividend payouts. It actually prioritizes reinvestment in the business.
Sources
- Residual Dividend: Definition, Purposes, Example - Investopedia - investopedia.com
- The web page with info on - Example Source - corporatefinanceinstitute.com
- Question 10 Mark this question What does the residual dividend ... - Chegg - chegg.com
