Factors affecting dividends Several factors affect a firm\'s ability to pay a di
ID: 2646944 • Letter: F
Question
Factors affecting dividends Several factors affect a firm's ability to pay a dividend. Three such factors are described In the table below: profitability (an increase In net income), investment opportunities, and capital structure (an Increase In the debt ratio). Use the table to Indicate how a firm's ability to pay a dividend Is affected by the factors described. Consider each factor In Isolation, with everything else held the same. Factor Effect on ability to pay dividends Net income increases. More profitable investment opportunities are available. The firm increases its debt ratio.Explanation / Answer
If net income increases it increases the ability to pay dividend
because dividends are those cash distributions that most companies pay out to shareholders from earning. as earning increases ability to pay dividend will also increase.
2. If more profitasble opportunies are available it will decrease the ability to pay dividend.
Because now the company will focus on its own growth rather than the growth of shareholders. Therefore only few growth companies will pay dividend as they will invest their earnings r ather than giving dividend.
3. If the firm increases its debt ratio the ability to pay dividend decreases
Because the no of shareholders will increase and it has to pay dividends to more people which will reduce the ability to pay dividend as the firm will be highly leverages.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.