Explain why firms may choose to pay or not pay dividends

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1. Explain why firms may choose to pay or not pay dividends.

2. It is often 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 disadvantage to a residual dividend policy? Explain with an example.

Reference no: EM133238706

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