It is sometimes suggested that firms should follow a residual dividend policy. With such a policy, the

Question:

It is sometimes suggested that firms should follow a “residual” dividend policy. With such a policy, the main idea is that a firm should focus on meeting its investment needs and maintaining its desired debt−equity ratio. Having done so, a firm pays out any leftover, or residual, income as dividends.

What do you think would be the chief drawback to a residual dividend 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...