Financial Management Domain Practice Test

Under the residual payout approach, dividends are the leftovers after funding all positive-NPV investments. You first use earnings to finance any worthwhile projects, and only the surplus funds are paid out as dividends. If there are no positive-NPV opportunities to invest in, there are no extra funds to distribute, so the firm would retain earnings and pay no dividends. This keeps the capital structure and investment opportunities prioritized before shareholder payouts. The other options would imply distributing money despite lacking profitable projects, taking on debt to fund dividends, or tying dividends to stock price, none of which align with the residual principle of funding all positive-NPV projects first.