Residual Dividend Model

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Question

The Residual Dividend Model is characterized as which of the following?

Answers

A. Dividend paid = EBIT (1 - combined state/federal tax rate) - preferred dividends - interest expense

B. Dividend paid = EBIT - Interest expense (1 - combined state/federal tax rate)

C. Dividend paid = EBIT - capital expenditures

D. None of these answers

E. Dividend paid = EBITA - proposed capital expenditures - interest expense

F. Dividend paid = EBIT - Retained earnings which are necessary to maintain the firm's optimal capital budget

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Explanations

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A. B. C. D. E. F.

The Residual Dividend Model is characterized by a firm paying out all earnings to common stockholders beyond that which is necessary to maintain the firm's optimal capital budget. Answer C correctly illustrates the calculation of the dividend paid according to the Residual Dividend Model.

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