A firm follows a strict residual dividend policy. This firm will have profits of $500,000 this year.

Question:

A firm follows a strict residual policy. This firm will have profits of $500,000 this year. After screening all available investment projects, the firm has decided to take three out of the 10 projects and those three will cost $410,000. The current equity market value of this firm is $5,000,500 and the current market price of its shares is $45.60. Estimate the current year per share. What is the shortcoming of this policy?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...