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Residual theory of dividends: pay dividends if equity is less than retained earnings?

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According to the residual theory of dividends, if the firm's equity need is less than the amount of retained earnings, the firm would ___________

borrow to pay the cash dividend,
declare a dividend equal to the remaining balance,
pay no cash dividends,
or not need to consider its dividend policy

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The solution presents a response with an explanation. The expert examines the pay dividends if equity is less.

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The residual theory of dividends says that all positive-NPV projects should be financed with retained earnings ...

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