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  What does the residual dividend model mean for investors? They should expect a level of...









 
What does the residual dividend model mean for investors?
  • They should expect a level of uncertainty regarding their dividends.
  • They should expect to consistently receive the same dividend.
  • They should expect to always receive very small dividends.
  • They should expect dividend distributions that are equal to net income.
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What does the residual dividend model mean for investor?

Answer: They should expect a level of uncertainty regarding their dividends.

Explanation: residual dividend model is a method of paying dividend, under this method company will fund the new eligible projects out of the funds available in the first place and if any amount is left then the company will pay dividend to the shareholders. Since dividends are paid out the residual balance left after funding the eligible projects, there will be an uncertainty regarding the dividend. There is no guarantee that company will pay dividend always, because dividend are paid of the funds available after fund the eligible projects, if funds are insufficient to fund the projects its self then there won’t be any dividend.

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