17.3 Selecting a Dividend Policy
Prior to selecting a dividend policy, a firm should review its cash flow requirements and future funding requirements. The goal is to produce sufficient cash flow to pay off debts in a timely fashion, maintain operations, and provide cash for reinvesting. Once the firm covers these three areas, it can distribute the remaining cash flow from operations to owners through dividends. When the firm pays out the funds left to shareholders, we call this distribution a residual dividend policy.
In a residual dividend policy, the firm issues dividend payments from leftover equity (the “residual”) only after it meets all other capital requirements. So one viable dividend policy might simply be a fluctuating cash dividend ...
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