Question

What is the advantage of disadvantage of residual dividend policy from the investor and the firm's perspective?

Answer 1

Answer: Advantages

1. This model is very simple to use. The company utilizes the funds for profitable projects and then distributes the remaining to the shareholders.

2. The management is free to pursue profitable opportunities without worrying about the dividend constraints.

Disadvantages

1. The dividend payments are highly volatile as they fluctuate with the available investment opportunities.

2. The investors may demand a higher rate of return on their equity because of the ambiguity about the future dividends . It may also results in lower valuation.