Final answer:
The residual dividend model states that the priority over distributing dividends is financing planned projects, ensuring the reinvestment of profits for expansion takes precedence over immediate shareholder distribution.
Step-by-step explanation:
According to the residual dividend model, the priority over distributing dividends is financing planned projects. This model suggests that dividends should be paid out from the residual or leftover equity only after all project capital requirements are met. In other words, if a company has profitable investment opportunities, it should use its earnings to finance these growth opportunities before paying out dividends to shareholders. Once all positive net present value (NPV) projects are funded, any residual earnings can be distributed as dividends. This financial management strategy ensures that firms prioritize the reinvestment of profits for expansion and meeting the cost of capital over immediate distribution to shareholders, aligning with long-term growth objectives.