Which of the following is a policy of a firm paying out only

Which of the following is a policy of a firm paying out only funds that are left over after all positive NPV projects are funded?

Bird-in-the-hand theory

Clientele effect policy

Residual dividend model

Dividend irrelevance theorem

Solution

Residual dividend model

As per the bird in hand theory investors prefer dividend from a stock rather than prospective capital gains due to the certainty of immediate dividends.

The dividend irrelevance theory says that investors are indifferent to return in the form of dividend or returns in the form of capital gains.

The clientelle Effect Theory explains that the company stock price moves according to the requirements and Expectations of investors. This affects the price of the securities.

The residual dividend model is the method used by companies to ascertain the amount of dividend that it will pay to the shareholders. The leftover earning after keeping aside retained earnings are paid out as dividend.