Advantages of Residual Theory

1. Saving on floatation costs

No require to raise debt or equity capital as there is high retention of earnings that necessitates no floatation costs.

2. Avoidance of dilution of ownership

New equity question would dilute ownership and control.  This will be avoided whether retention is high. A high retention policy might be enable financing of firms along with rapid and high rate of growth.

3. Tax position of shareholders

High-income shareholders prefer low dividends to decrease their tax burden on dividends income. They prefer high retention of earnings such are reinvested, rises share value and they can gain capital gains such are not taxable in US.