Answer (D) is correct . Under the residual theory of dividends, the amount (residual) of earnings paid as dividends depends on the available investment opportunities and the debt- equity ratio at which cost of capital is minimized. The rational investor should prefer reinvestment of retained earnings when the return exceeds what the investor could earn on investments of equal risk. However, the firm may prefer to pay dividends when investment opportunities are poor and the use of internal equity financing would move the firm away from its ideal capital structure.
Answer (A) is incorrect because The cash dividend would not be stable, but a residual.
Answer (B) is incorrect because The residual theory concerns cash dividends.
Answer (C) is incorrect because All earnings are not distributed as dividends.
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