Residual dividend theory suggests dividends should be paid only after funding what?

• A. Minimum desired retention
• B. Current earnings per share
• C. Positive-NPV investment opportunities
• D. Profit after tax

Answer: (C)

Dividends under the residual dividend theory are determined by the opportunities the firm has to invest in value‑adding projects. The idea is to first retain funds to finance all positive‑NPV investments, and only after those opportunities are funded should any leftover cash be paid out as dividends. This approach prioritizes maximizing shareholder value—investing in worthwhile projects is expected to raise the firm’s value, so dividends are given out only from what remains after those investments are funded. If there are no positive‑NPV opportunities, cash can be distributed as dividends; if there are, returns to shareholders come from whatever is left after funding them. The other options don’t capture this focus on financing value‑creating investments before distributing cash.