Question

Although a company is increasing net income annually, the company continues to reinvest all earnings because of a great need for expansion. This is an example of

a) clientele dividend theory

b) signaling dividend theory

c) residual dividend theory

d) bird-in-the-hand dividend theory

Answer 1

Option c is correct residual dividend theory gives higher priority to reinvestment and makes dividends less relevant.

Option a is incorrect. According to this the company provides dividends which matches investors expectations
Option b is incorrect. According to signalling theory dividend announcement has positive affect on share prices.
Option c is incorrect Bird in hand theory is opposite of MM theory of dividend irrelevance, Bird in hand theory suggests that dividends are assured and immediately received hence investors prefer dividends over capital gain which is not certain